Question

A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

a. Only footnote disclosure.

b. That the cumulative amount of the change be shown as a line item on the income statement, net of tax.

c. That the change be accounted for cumently and prospectively.

d. Retroactive restatement as if the investor always had used the equity method,

What is the correct answer ?

Answer 1

D. Retroactive restatement as if the investor always had used the equity method.

In order to make users of financial statements a more informed decision making, it is necessary to present a retroctive statement as if the investor always used the equity method, when ever a change to equity method is a result of increase in the number of shares held by investors.

Mere foot note disclosures, or prospective disclosure or disclosure in form of line item on income statement is not sufficient.