In a recent development, Magnus Tech has reported its significant stake of 30% in Mirika Inc., a prominent technology company. Magnus Tech follows the equity method of accounting to reflect its investment in Mirika. However, the year has brought some challenges for Mirika, as it reports a net loss of $2,500,000. Additionally, the company has paid out a total of $70,000 in dividends.
The equity method is commonly used when a company possesses significant influence over another company, but not control. By owning 30% of Mirika, Magnus Tech is considered a major shareholder and accounts for its investment using this method. This technique allows Magnus Tech to reflect its share of Mirika's financial performance on its own books.
The net loss of $2,500,000 reported by Mirika has a direct impact on Magnus Tech's financial position. As per the equity method, Magnus Tech will record its share of the loss, which amounts to $750,000. This loss is reflected in Magnus Tech's income statement, reducing its overall profitability for the year.