Roger Philipp, CPA discusses the three methods of accounting for investments. This brief excerpt from the FAR section of the Roger CPA Review Online and USB course introduces the concepts of Cost Method or Marketable Securities, the Equity method and Consolidation. The excerpted text below comes straight from Roger's Financial Accounting and Reporting textbook.
An investor may acquire equity securities (common or preferred stock) debt securities (bonds) and derivatives (stock rights) in other companies. When a company acquires common stock, we need to determine the appropriate method of accounting for the investment, and this will depend primarily upon the amount of stock that is owned by the investor. 0-20%: Cost Method or Marketable Securities 20-50%: Equity Method (One-line consolidation) 50% or more: Consolidation
0-20%: Cost Method or Marketable Securities
20-50%: Equity Method (One-line consolidation)
50% or more: Consolidation