A.Discuss the criteria for applying the equity method of accounting for long-term investments.
B.Discuss the rationale for the equity method procedures of accounting for long-term investments.

A.The criteria for applying the equity method of accounting for long-term investments are based on the ownership level of the investor in the voting stock of the investee.The presumption is that if the investor owns at least 20% of the investee's voting stock but not more than 50% of such stock,the investor has significant influence over the investee.This means that the investor has an important impact on the operating and financing policies of the investee.Significant influence is typically achieved by the investor being on the investee's board of directors,management personnel is interchanged between the two companies,and other such evidence of influence.
B.The rationale for the equity method of accounting is rather like an "accrual" system.That is,the relationship of the affiliate and investor is typically expected to be a long-term association.As such,the investor recognizes income on an accrual rather than a cash basis.The proportionate share of income in the affiliate is recognized on the income statement and the investment (asset)account is increased.When actual dividends are received by the investor,they reduce the investment account since some of the previously recognized income is being distributed.