Under the equity method, what does the investor record?

• A. The investor records only dividends received
• B. The investor records fully consolidated revenues
• C. The investor records share of investee's earnings and adjusts carrying amount
• D. The investor records no income until disposal

Answer: (C)

Under the equity method, the investor accounts for its stake as a reflection of ongoing influence on the investee. The investment is initially recorded at cost, and thereafter the investor recognizes its share of the investee’s earnings as income and increases the carrying amount of the investment by that share. If the investee pays dividends, those dividends reduce the carrying amount of the investment rather than being recorded as dividend income. This approach shows the investor’s ongoing economic interest and updates the investment balance to reflect changes in the investee’s equity.