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:

Temperature

A physical quantity that expresses the subjective perceptions of hot and cold, measured with a thermometer.

Temperature Rises

An increase in the degree of heat present in a substance or environment, often measured in Celsius or Fahrenheit.

Pressure

The force exerted per unit area on the surface of an object, often measured in pascals (Pa) or atmospheres (atm).

Temperature Rises

An increase in the average kinetic energy of the particles in a substance, leading to an increase in its temperature.