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Investments
There are various methods to account for corporate investments, and often management has some discretion in selecting a method. When one company (a parent company) controls more than 50% of the shares of another company (a subsidiary), the subsidiary's accounts are consolidated into the parent's. When the control is less than 50%, there are three basic methods for carrying the value of an investment: these are the cost, market, and equity methods. We show each method below. But first, keep in mind there are three sorts of investment returns:
1. Theinvestmentcanappreciate(ordepreciate)inmarketvalue:wecallthese holding gains or losses.
2. Theinvestmentcangenerateearningsthatarenotcurrentlydistributedto the parent (they are instead retained): we call this investment income.
3. Theinvestmentcandistributesomeofitsincomeascashdividendstothe parent.
The table below explains the three methods of accounting for corporate investments that are less than 50% owned by the parent:
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