Club CoAppropriately Uses the Equity Method to Account for Its Investment

question 36

Multiple Choice

Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2018, Chip's common stock had suffered a significant decline in fair value, which is expected to recover over the next several months.How should Club account for the decline in value?

• A) Club should switch to the fair-value method.
• B) No accounting because the decline in fair value is temporary.
• C) Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
• D) Club should not record its share of Chip's 2018 earnings until the decline in the fair value of the stock has been recovered.
• E) Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

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Definitions:

Double-Entry Accounting

A bookkeeping system that records each transaction in at least two accounts, ensuring the accounting equation is always balanced.

Market Values

The current price at which an asset or service can be bought or sold in the open market, influenced by supply and demand dynamics.

Managerial Accounting

This type of accounting focuses on providing financial information within a company to assist in decision-making and management.

Calculating Product Cost

Calculating product cost involves determining all the direct costs associated with the production of a product, including raw materials, labor, and overhead expenses.