Discuss how the equity method of accounting for investments prevents managers of the investor corporation from manipulating income related to dividends from the investee.

When one corporation exerts significant influence over another (such influence is presumed to result from ownership of 20 to 50 percent of the common shares),it is unreasonable to assume that transactions between those corporations are made at "arm's length" as assumed in financial accounting.Without the equity method,managers of the investor company could manipulate income by influencing the investee's dividend policy.Large dividend payments could be used to bolster income in bad years.The equity method prevents this type of manipulation by requiring dividends received to be offset against the investment account rather than recognized as income.