Under the Equity Method, Which of the Following Statements Is

question 31

Multiple Choice

Under the Equity Method, which of the following statements is TRUE?

• A) The parent's investment in the subsidiary is recorded at cost, and only changed thereafter if there has been a permanent impairment in the value of the investment.
• B) The parent records its pro rata share of the subsidiary's post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
• C) The parent records its pro rata share of the subsidiary's cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
• D) The parent's investment in the Subsidiary is recorded at Cost and reduced by any excess dividends received from the subsidiary.

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Definitions:

Asymmetric Information

A situation where one party to a market transaction has more information about a product or service than the other. The result may be an under- or overallocation of resources.

Adverse Selection

A situation in insurance and finance where individuals with higher risks are more likely to purchase or participate in a plan, leading to higher than expected costs for insurers or lenders.

Marginal Benefit

The extra utility or satisfaction obtained through the consumption of an additional unit of a good or service.

Pollution Abatement

Actions or measures taken to reduce, control, or eliminate pollution from various sources.