Equity Investments (significant Influence)
When a company can exert significant influence over
another, the equity securities it owns of that company
must be accounted for using the Equity Method.
Significant influence is usually believed to result if the
company owns in excess of 20-25% of the outstanding
shares of the other company.
Under this method of accounting, we

Record dividends as a return of investment (credit
investment account), rather than as income

Report income (and increase investment account)
equal to percentage ownership in earnings of investee
company.
The investment account, thus, rises (falls) with those events
that increase (decrease) retained earnings of investee
company
Here is an example from the annual report of Coca-Cola:
Coke accounts for its investments in its bottling companies using
the equity method.
Details relating to
this investment
are found it the
notes:
Coke owns 40% of CocaCola Enterprises book
value is $2,924. The
investment would be on
Coke’s books for
$1169.6b (40% * $2.9b)
were it not for the fact
that Coke paid less than
book value for the
company (negative
goodwill) that is also
reflected in its investment
account.
One point to remember – investments accounted for under the
equity method are not marked-to-market like passive investments
discussed earlier. They are reported at cost, adjusted for dividends
and the proportionate share of investee company earnings.
As a result, there can be a significant amount of unrealized gains
or losses as the following note illustrates:
There is an unrealized gain of $2.7 billion relating to this
investment. This will not be reflected in Coke’s income and
stockholder’s equity until the investment is sold.