How to choose the cost method and the equity method, and is there a restriction on the proportion of

Updated on Financial 2024-07-20
8 answers
  1. Anonymous users2024-02-13

    Generally, if the shareholding ratio is between 20% and 50%, it is accounted for by the equity method.

    Generally, if the shareholding ratio is more than 50%, the cost method is used for accounting.

  2. Anonymous users2024-02-12

    The scope of cost-based accounting.

    A long-term equity investment in which an enterprise is able to exercise control over the investee. That is, the long-term equity investment of the enterprise in the subsidiary.

    The enterprise does not have control, joint control or significant influence over the investee, and does not have a long-term equity investment in an active market and its fair value cannot be reliably measured.

    The scope of equity method accounting.

    A long-term equity investment in which the enterprise has common control over the investee. That is, the long-term equity investment of the enterprise in its joint venture.

    A long-term equity investment in which the company has a significant impact on the investee (accounting for 20%-50% of the equity). That is, the long-term equity investment of the enterprise in its associates.

    When the cost method is adopted, the carrying amount of a long-term equity investment should generally remain the same, except for additional or recouped investments. After the investor obtains a long-term equity investment, when the investee realizes net profit, it will not be treated as an account. The profits or cash dividends declared by the investee are recognized as investment income for the current period, regardless of whether the net profit is realized before or after the investee accepts the investment.

    The investment income recognized by the investment enterprise is limited to the distribution of the accumulated net profit generated by the investee after accepting the investment, and the part of the profit or cash dividend declared by the investee that exceeds the above amount shall be used as the recovery of the initial investment cost to offset the book value of the investment.

    If the former is greater than the latter, the initial book value of the long-term equity investment (i.e., the initial book value of the acquired cost is taken as the initial book value), and if the former is less than the latter, the initial book value of the long-term equity investment (i.e., the fair value of the share is taken as its initial value) should be adjusted. The difference between the two shall be included in the non-operating income) The investment enterprise shall, after obtaining the equity investment, adjust the carrying amount of the investment according to the share of the net profit realized or the net loss incurred by the investee in the current year (except for the net profit that is not the investment enterprise as stipulated by laws and regulations or the articles of association), and recognize it as the investment profit or loss for the current period. The investment enterprise calculates the portion of the distribution according to the profits or cash dividends declared by the investee, and reduces the book value of the investment accordingly.

    Enterprises should regularly check the carrying amount of long-term equity investments on a case-by-case basis, at least once at the end of each year. If the recoverable amount is lower than the book value of the investment due to the continuous market price** or changes in the investee's operating conditions, the difference between the recoverable amount and the book value of the long-term equity investment shall be recognized as an investment loss for the current period.

  3. Anonymous users2024-02-11

    When an enterprise fully controls the subsidiary, that is, the shareholding reaches more than 50%, the cost method is used to account for the company's shareholding, and the company's shareholding is less than 20%, which is generally considered to have no significant impact on the subsidiary and joint operation, and the cost method is also used, but 50% and 20% are not absolute numbers, and should be judged according to the actual control of the enterprise over the subsidiary.

    Long-term equity investments in which the investment enterprise has common control or significant influence over the investee shall be accounted for by the equity method.

    Both the cost method and the equity method of long-term equity investment have their own advantages and disadvantages, and the key is to apply them to the right content. At the same time, the cost method and the equity method can also be converted, and the conversion of the accounting method for long-term equity investment is also a key content that everyone needs to grasp.

    Generally, the cost method is applied to the shareholding ratio greater than 50, and the equity method is applied to the shareholding ratio greater than 20 and less than 50.

  4. Anonymous users2024-02-10

    1) Carry forward the cost of long-term equity investment that should be derecognized according to the proportion of disposal or recovery of investment, 2) Compare the remaining cost of long-term equity investment with the share of fair value of the investee's identifiable net assets when calculating the original investment according to the proportion of residual shareholding, and the remaining investment cost > The fair value share of the investee's identifiable net assets shall be entitled to at the time of the original investment No adjustment, residual investment cost < When the original investment is in the same place, it shall be entitled to the fair value share of the investee's identifiable net assets, borrowing: long-term equity investment - cost, credit: surplus reserve, profit distribution - undistributed profit, 3) For the share of the investee in the net profit or loss realized by the investee between the original acquisition of the investment and the conversion to equity method accounting due to the disposal of the investment, the carrying amount of the long-term equity investment shall be adjusted on the one hand, and the retained earnings shall be adjusted for the share of the net profit or loss realized by the investee from the time of acquisition of the investment to the beginning of the current period of disposal of the investment (net of cash dividends or profits that have been paid and declared).

    Borrow: Long-term Equity Investment - Profit and Loss Adjustment, Credit: Surplus Reserve, Profit Distribution - Undistributed Profit, 4) Adjust the current profit or loss for the share of the investee in the net profit or loss realized between the beginning of the current period and the date of disposal of the investment, Borrow:

    Long-term equity investment - profit and loss adjustment, credit: investment income, 5) the share of the investee in the change in the owner's equity caused by other reasons shall be recorded in the account of "capital reserve - other capital reserve" while adjusting the book value of long-term equity investment.

    6) After the long-term equity investment is converted from the cost method to the equity method, the share of the net profit or loss realized by the investee and other changes in the owner's equity shall be calculated and recognized in accordance with the provisions of the standards in the future period.

  5. Anonymous users2024-02-09

    The shareholding ratio is 20%-50% using the equity method accounting, and the shareholding ratio is less than 20% and more than 50% is accounted for using the cost method Thank you for adopting!!

  6. Anonymous users2024-02-08

    Scope of application of the cost method: The long-term equity investment of an enterprise shall be accounted for by the cost method or the equity method according to different circumstances; If the enterprise has no control, no joint control and no significant influence on the investee, the long-term equity investment shall be accounted for using the cost method. If an enterprise's investment in other units accounts for less than 20% of the total voting capital of the unit, or if the investment in other units accounts for 20% or more of the total voting capital of the unit, but does not have a significant impact, the cost method shall be adopted.

    Scope of application of the equity method: If the enterprise has control, joint control or significant influence over the investee, the long-term equity investment shall be accounted for by the equity method. Under normal circumstances, if an enterprise's investment in other entities accounts for 20% or more of the total voting capital of the entity, or if the investment is less than 20% but has a significant impact, the equity method of accounting shall be adopted.

  7. Anonymous users2024-02-07

    The applicable boundaries of the cost method and the equity method: the equity method is used to account for the shareholding ratio between 20 50, and the cost method is used to account for other shareholding ratios.

  8. Anonymous users2024-02-06

    Differences between the cost method and the equity method: the concept, the scope of application, and the treatment of investment income are different.

    1. The concept of simplification is different.

    The cost method refers to the method of valuing long-term equity investments at the actual cost of the investment. This approach requires that the carrying amount of long-term equity investments be increased only when the firm increases its long-term investment abroad. The equity method refers to the method by which the book value of the investment is adjusted according to the share of the owner's equity of the invested enterprise according to the change in the owner's equity of the invested enterprise during the holding period after the investment is measured as an initial investment.

    2. The scope of noise adaptation is different.

    The application of the equity method is the accounting of long-term equity investment in joint ventures and associates, usually accounting for 20% to 50% of the shares; The cost method applies to enterprises or subsidiaries that are able to exercise control (i.e., more than 50% of the shares).

    3. The treatment of investment income is different.

    1) The cost method is understood as a cash basis, regardless of whether it is a profit or a loss, and the investment income is recognized only when the invested enterprise declares dividends. The carrying amount of long-term equity investments under the cost method is generally not adjusted unless the investment is increased or decreased.

    2) The equity method is understood as the accrual basis, as long as the invested enterprise has a profit at the end of the year, regardless of whether it is divided or not, the investment income will be recognized in proportion to the share I enjoy, and the book value of the long-term equity investment will be adjusted. Of course, if there is an internal transaction with an associate or joint venture, it will also be offset.

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