An Investor That Uses the Equity Method of Accounting for Its

question 19

Multiple Choice

An investor that uses the equity method of accounting for its investment in a 40 percent-owned investee that earned $50,000 and paid $8,000 in dividends,made the following entries:
Investment in Equity Securities
20,000
Equity in Earnings of Investee
20,000
Cash
3,200
Dividend Revenue
3,200
What effect will these entries have on the parent corporation's statement of financial position?

• A)Investment in subsidiary understated, retained earnings understated.
• B)Investment in subsidiary overstated, retained earnings overstated.
• C)Investment in subsidiary overstated, retained earnings understated.
• D)Financial position will be fairly stated.

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Definitions:

Retail Inventory Method

An accounting procedure for estimating inventory value by applying a percentage cost-to-retail price.

Inventory Value

The total cost or market value of all items held in inventory, including raw materials, work-in-progress, and finished goods.

FIFO Cost Flow Assumption

An inventory valuation method where goods purchased first are the first sold, assuming costs are charged in the order in which they are incurred.

LIFO Cost Flow Assumption

An inventory valuation method that assumes the last items added to inventory are the first sold, affecting the cost of goods sold and ending inventory value.