Equity Method Investments
Definition: 20-50% ownership; share of earnings
Scope:ModerateDifficulty:Difficult
20-50% ownership; share of earnings
Common Journal Entries
| Account | Debit | Credit |
|---|---|---|
| 1. Acquire 30% interest | ||
| Pay $50,000 for 30% of investee. | ||
| Investment in AssociateAsset+ | $50,000 | |
| CashAsset− | $50,000 | |
| Significant influence (20–50%); equity method required. | ||
| 2. Record share of income | ||
| Investee earns $20,000; 30% = $6,000. | ||
| Investment in AssociateAsset+ | $6,000 | |
| Equity in Earnings of AssociateRevenue+ | $6,000 | |
| Investment increases by proportional share of income. | ||
| 3. Receive dividend | ||
| Investee pays $10,000 dividend; 30% = $3,000. | ||
| CashAsset+ | $3,000 | |
| Investment in AssociateAsset− | $3,000 | |
| Dividend reduces the investment balance, not income. | ||
T-AccountsA visual representation of a ledger account shaped like the letter T. Left side shows debits, right side shows credits.
Investment in AssociateInvestment in AssociateAssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$50,000.00
$6,000.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$3,000.00
$53,000.00
CashAsset account. Debits increase the balance. Credits decrease the balance.AssetA resource owned by the business. Normal balance: debit. Debits increase, credits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
$3,000.00
◀ Normal bal.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$50,000.00
$47,000.00
Equity in Earnings of AssociateEquity in Earnings of AssociateRevenueIncome earned from business operations. Normal balance: credit. Credits increase, debits decrease.
DebitLeft side of a journal entry. Increases assets and expenses. Decreases liabilities, equity, and revenue.
CreditRight side of a journal entry. Increases liabilities, equity, and revenue. Decreases assets and expenses.
$6,000.00
Normal bal. ▶
$6,000.00
DurationLong-Term
External Links
- Equity method — Wikipedia