Question

Which of the following observations is NOT consistent with the cost method of accounting? Dividends from...

Which of the following observations is NOT consistent with the cost method of accounting?

Dividends from Investee are not recognized as Income

Investments are carried by the investor at historical cost.

No journal entry is made regarding the earnings of the investee.

In a nonconsolidated situation, it is only used if you own less than 20% of another company

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Answer #1

Ans: Dividend from investee are not recognized as income is NOT consistent with the cost method of accounting.

Cost method of accounting is used when the investor holds less than 20% of investment and has no control or influence over the investment it owns. The relationship is not called as parent and subsidiary. Therefore, Cost method of accounting is used to record investment. It is called as non consolidated situation or unconsolidated situation.

Investments are recorded at Historical cost and any dividend income is recognozed as income.

Also, the Investor does have to pass journal entry regarding earnings of the investee. It is required in the Equity method of accounting.

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