Asked by Trinity McClendon on Apr 27, 2024
Verified
Which of the following statements regarding the accounting for a common stock investment using the equity method is incorrect?
A) The equity method is used for investments of ownership between 20% and 50% of the outstanding voting stock when the investor has the ability to exert significant influence.
B) The investment account is increased by the proportionate share of affiliate net income.
C) The investment account is decreased by the proportionate share of affiliate dividends.
D) Investment income equals the proportionate share of affiliate dividends.
Equity Method
An accounting technique used by firms to assess the profits earned from their investments in other companies, where the investment is recorded at original cost and adjusted for the investor's share of the investee's profit or loss.
Outstanding Voting Stock
The shares of a corporation that are issued, held by shareholders, and entitled to vote in corporate decisions.
Affiliate Dividends
Affiliate dividends refer to the distribution of earnings paid to shareholders of a subsidiary or an affiliate company.
- Understand the documentation prerequisites for investments pursuant to the equity method.
Verified Answer
TW
Timisiha WalkerApr 30, 2024
Final Answer :
D
Explanation :
Investment income equals the proportionate share of affiliate net income, not dividends. Dividends only decrease the investment account.
Learning Objectives
- Understand the documentation prerequisites for investments pursuant to the equity method.