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Equity method mechanics An investor owns 25% of the outstanding common stock of an investee company....

Equity method mechanics
An investor owns 25% of the outstanding common stock of an investee company. The Equity Investment was reported at $500,000 as of the end of the previous year. During the year, the investee pays dividends of $50,000 to the investor. The investee reports the following income statement for the year:

Revenues $2,000,000
Expenses 1,570,000
Net income $430,000

Required
a. How much equity income should the investor report in its income statement?

$Answer

b. What amount should the investor report for the Equity Investment in its balance sheet at the end of the year?

$Answer

c. Assume that the fair value of the investee company is $1.7 million at the end of the year (approximately five times reported earnings). How should the fair value of the investee company be reflected in the investor’s financial statements?

be adjusted to fair value.

remain at adjusted cost.

remain at the adjusted cost plus a gain should be reported in AOCI.

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