For example, the investee might regard the investor with hostility and disregard the investor's advice.
An investor corporation adjusts the carrying value of its investment by its proportionate share of investee profits and losses.
For example, if an investing corporation owns 25 percent of the investee’s common stock, it increases the carrying value of its investment by $250,000 if the investee reports earnings of $1 million for the period.
Generally accepted accounting principles assume that an investor has enough control to warrant the use of the equity method if it owns from 20 percent to 50 percent of the investee’s common stock.
However, the investor may avoid the equity method if it can prove to the satisfaction of the Internal Revenue Service that such control is an illusion.
Corporations distribute dividends from the equity account called retained earnings, which records the accumulated profits of the company.