Under the Equity Method of Accounting for Long-Term Investments in Common

question 32

Multiple Choice

Under the equity method of accounting for long-term investments in common stock,when a cash dividend is received from the investee company:

• A)the investor's Equity-method Investment account is increased.
• B)the Dividend Revenue account is increased.
• C)the investor's Equity-method Investment account is decreased.
• D)no entry is necessary.

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Definitions:

Significant Influence

The power to participate in the financial and operating policy decisions of an investee, without having full control or joint control, typically associated with ownership of 20% to 50% of voting stock.

Shareholders' Equity

The residual interest in the assets of a corporation that remains after deducting liabilities, representing the ownership interest of shareholders.

Pre-acquisition Profits

The earnings generated by an acquired company prior to the date on which it was acquired by the parent company.