Equity and Cost Methods in Accounting Essay Example | Topics and Well Written Essays - 250 words

Equity and Cost Methods in Accounting - leaven ExampleThe cost method acting, therefore, shows a bigger value for the investment than the lawfulness method.Since dividends under the cost method are a form of revenue, they create taxable income. For example, if the Investee Corporation pays out $1.50 per share in dividends in 2011, Investor Corporations income is $12,000. In the 25 percent tax bracket, its tax liability would be $4,000. The equity method affects income greatly and hence has an effect on income taxes. Suppose Investee Corporation depicts income of $100,000 in 2011. Investor Corporation would record income of $20,000. The tax liability would $5,000. Income is more volatile than the dividend yield hence the equity method is more potential to affect the Investor Corporations tax liability.Since earnings of the investee corporation keep changing from year to year, it would be recommendable that the Investor Corporation should practice the fair value method. That would help it avoid reporting the share of the investees earnings and losses that it bears. The changes in earnings of the Investee everyplace the years will, therefore, have little effect on the value of the investment over