How is the investment accounted for under the equity method?

Under the equity method, the investor recognizes income from its investment in the investee and adjusts the carrying amount of the investment accordingly. This approach reflects the investor's share of the investee’s profits or losses, which are recorded as income on the investor's income statement.

When the investee earns profits, the investor increases the carrying value of its investment. Conversely, if the investee incurs losses, the investor decreases the carrying amount. This dynamic accounting treatment helps to ensure that the investor's financial statements provide an accurate depiction of the economic reality of their stake in the investee, as it captures not only the initial investment but also the subsequent changes in the investee's financial performance.

Other options do not accurately represent the principles of the equity method. Ignoring investee losses fails to reflect the actual performance of the investment. Focusing solely on cash dividends overlooks other aspects of the investee's financial results that affect the investment's value. Finally, a write-off of the investment annually is not aligned with the equity method's principles, as it would not properly account for ongoing performance and changes in value.