How Should a Permanent Loss in Value of an Investment

question 45

Multiple Choice

How should a permanent loss in value of an investment using the equity method be treated?

• A) The equity in investee income is reduced.
• B) A loss is reported in the same manner as a loss in value of other long-term assets.
• C) The investor's stockholders' equity is reduced.
• D) No adjustment is necessary.
• E) Record an offset to cash.

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Definitions:

Operating Leverage

A measure of how sensitive a company's operating income is to a change in its revenues, indicating the proportion of fixed costs in the company's cost structure.

Contribution Format Income Statement

An income statement format that separates fixed costs from variable costs, thus showing the contribution margin.

Degree of Operating Leverage

A financial ratio that measures the sensitivity of a company's operating income to its sales, indicating how revenue growth translates into growth in operating income.

Variable Expenses

Costs that change in proportion to the level of business activity or production volume.