Under the Equity Method, When the Company's Share of Cumulative

question 88

Multiple Choice

Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true?

• A) The investor should change to the fair-value method to account for its investment.
• B) The investor should suspend applying the equity method until the investee reports income.
• C) The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.
• D) The cumulative losses should be reported as a prior period adjustment.
• E) The investor should report these losses as extraordinary items.

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Definitions:

Prices

The amounts of money required to purchase goods and services, serving as signals in an economy to allocate resources.

Income

Payment for services or from investment returns, customarily coming in at steady intervals.

Preferences

In economics, it refers to the ordering of different alternatives by individuals based on their satisfaction, utility, or happiness.

Compensating Variation

A measure in economics of the amount of money one would need to reach their original utility level after a change in price or income.