The equity method of recording an investment in an investee exists to avoid the manipulation of the investor's income through influencing the dividend policy of its investee.

Question

Quizplus · Accepted Answer

The equity method of accounting for investments in an investee is designed to ensure that the investor's reported income reflects the economic benefits accruing from their investment in the investee. This is achieved by recording the investor's proportional share of the investee's earnings, regardless of whether or not the investee declares dividends. This prevents the investor from manipulating their reported income by influencing the investee's dividend policy. Therefore, the statement is true.

The Equity Method of Recording an Investment in an Investee