This audio will introduce you to cost adjusted for fair value method and equity method of accounting.
The cost adjusted for fair value method records the cost of investment in the investment account. Dividends distributed from income of the investee is recognized as income. Any dividends distributed by the investee exceeding the earnings are classified as the return of capital. They are treated as a reduction from the investment account. Under cost adjusted for fair value method, equity securities are adjusted for subsequent changes in the fair value. Unrealized holding gains and losses equals the current fair value, minus the previous period’s fair value on the books.
The equity method of accounting also records the cost of investment in the investment account. As changes occurs in the net assets of the investee, the investor, will recognize such changes, as a percentage of ownership of shares in the investment account. Differential, is the difference between the cost of the investment and the underlying book value of the net assets of the investee. If differential is related to the assets with finite useful lives, it will be amortized in the investment account. Note that the goodwill is not amortized. However, the goodwill is written down, if the investment is determined to be impaired in the equity method of accounting.