Club Co Appropriately Uses the Equity Method to Account for Its

question 42

Multiple Choice

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2011, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered 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 2011 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:

Endocrine

Pertaining to glands that secrete hormones directly into the bloodstream to regulate bodily functions.

Muscular

Pertaining to or involving the muscles.

Nervous

Relating to the nervous system, or describing a state of anxiety or tension.

Skeletal

Relating to the framework of hard structures (bones) that support or protect the body's organs and provide structure.