Options given: a.10% of S\'s income for Jan to July, plus 40% of S\'s income fro

Question

Options given:
a.10% of S's income for Jan to July, plus 40% of S's income fro August to December31
b.40% of S's income for August to December 31 only
c.40% of S's income
d.Amount equal to dividends received from S

* the correct answer indicated in the Sol.man is a !

I do not understand why! if a company has only 10% CS, it means that the company does not have significant influence therefore, it should account for the share of income by using the Cost method, which also means that betw. Jan and August the company was not entitled to record the NI share. I's love to know what's faulty with my logic?

Explanation / Answer

Here P's holding is initially 10% & then increases to 40%. However P remains a Minority shareholder & will use Equity method to record his income. Equity method in accounting is the process of treating equity investments, usually 20–50%, in associate companies. The investor keeps such equities as an asset. Proportional share of associate company's net income increases the investment, and proportional payment of dividends decreases it. In the investor’s income statement, the proportional share of the investee’s net income is reported as a single-line item. Thus Ans 'a' is correct.

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