When Using the Equity Method to Account for an Investment

question 94

Multiple Choice

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:

• A) As a reduction in the investment account.
• B) As an increase in the investment account.
• C) As dividend income.
• D) As a contra item to stockholders' equity.

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Definitions:

Straight-Line Depreciation

An accounting method that allocates the cost of a tangible asset evenly over its useful life.

Variable Cost

Outlays that shift in alignment with the quantity of output generated.

Discount Rate

The interest rate used to discount future cash flows of a financial instrument back to their present value, thus reflecting the cost of capital.

Initial Cost

The upfront expense incurred to purchase an asset or start a project, including all relevant expenses.