Cucumber Company Concluded at the Beginning of 2009 That the Company's

question 102

Multiple Choice

Cucumber Company concluded at the beginning of 2009 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for their investment as available for sale, rather than using the equity method as they had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as an available-for-sale investment. After implementing the change to the available-for-sale method, if financial statements were prepared,

• A)net income and retained earnings will be lower by $25,000.
• B)net income will be unchanged, and retained earnings will be lower by $25,000.
• C)the accounts will be unchanged, because no adjustment is necessary.
• D)other comprehensive income and accumulated other comprehensive income will be lower by $25,000.the equity method balance becomes the new cost basis, but under AFS reporting the investment must be marked to fair value with unrealized gains and losses shown in other comprehensive income and accumulated other comprehensive income.

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Definitions:

General Journal

A comprehensive record of financial transactions over the life of a company, listed in chronological order.

Assets

Resources owned by a company or individual that have economic value and can provide future benefits.

Debits

Accounting entries that increase assets or expenses and decrease liabilities, equity, or revenue.

Credits

Entries that increase liabilities, revenues, or equity, or decrease assets or expenses in accounting.