Question

1. Assume Big bought a small amount of stock in Little in Year 1, and properly used the fair value method to account for this investment. In Year 2, it bought enough extra stock that it should use the equity method. True or false: Big should restate its Year 1 financial statements to show the investment as if it had used the equity method.
2. True/False: Under the equity method of accounting for investments, an investor must record an impairment loss when there is a permanent decline in the value of the investment.

Answer 1

1 true

Reason: It is mandatory to give the retrospective treatment if there is a conversion from fair value method to equity method.Thus all accounts are restated so that the investors financial statements appear as if the equity method had been applied from the date of first acquisition.

2 True

Reason:When a permanent decline in an equity method investment’s value occurs, the investor must recognize an impairment loss and reduce the asset to fair value. However, APB Opinion 18 stresses that this loss must be permanent before such recognition becomes necessary. Under the equity method, a temporary drop in the fair value of an investment is simply ignored