When an Investment Is Accounted for Using the Equity Method

question 60

Multiple Choice

When an investment is accounted for using the Equity Method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor?

• A) Any such gains or losses are to be charged directly to Retained Earnings net of tax.
• B) Any such gains or losses are included with the revenue and expenses from operations. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
• C) Any such gains or losses are shown separately, net of tax, below income from operations on the investor's Income Statement. The investor's pro rata share of these after-tax gains and losses are added to or deducted from the Investment account.
• D) No specific accounting treatment is required. These items simply have to be disclosed in notes to the financial statements.

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Definitions:

Executor

The personal representative appointed to administer the estate of a person who died leaving a valid will.

Beneficiaries

Individuals or entities designated to receive the benefits or proceeds from insurance policies, trusts, wills, or other contracts.

Testator

An individual who has made a will or testament, in which they designate the distribution of their estate after their death.

Issue

Lineal descendants such as children and grandchildren. This category of persons includes adopted children.