area II E. Investments

Question 1

FAR1B10020
Which of the following best describes the purpose of a trial balance in preparing a non-profit’s financial statements?
A. To calculate the organization’s profit or loss
B. To ensure that all ledger accounts are balanced
C. To list the organization’s donors and their contributions
D. To record the organization’s operational policies

Answer 1

B. To ensure that all ledger accounts are balanced

The primary purpose of a trial balance is to ensure that the total debits equal the total credits in the ledger accounts, indicating that the books are in balance.

Question 2

FAR2G10003
If a company accrues wages of $5,000 at the end of the accounting period, what is the impact on the balance sheet?
A) Increase in assets and decrease in equity
B) Increase in liabilities and decrease in equity
C) Increase in liabilities and no impact on equity
D) No impact on liabilities and a decrease in equity

Answer 2

C) Increase in liabilities and no impact on equity

Accruing wages increases wages payable but does not immediately affect equity. Equity is impacted when the expense is recognized, not when it is accrued.

Question 3

FAR2G10013
When a company announces a severance package that employees can accept within 30 days, when should the related liability be recognized?
A) Immediately upon announcement.
B) After the 30-day period ends.
C) When each employee accepts the package.
D) At the time of actual payment to employees.

Answer 3

B) After the 30-day period ends.

The liability for a severance package that requires employee acceptance should be recognized after the acceptance period ends and the number of employees accepting the package is known.

Question 4

FAR3F10036
A lessee’s lease liability is initially $50,000. If the annual interest rate is 4% and the annual lease payment is $10,000, what is the interest expense for the first year?
A. $2,000
B. $4,000
C. $1,600
D. $2,400

Answer 4

A. $2,000

Interest expense is calculated on the lease liability at the beginning of the period. So, $50,000 x 4% = $2,000. Since the lease payment is made annually, the full year’s interest is recognized.

Question 5

FAR3G10010
If a company learns about a significant error in its inventory count for the reporting period after the balance sheet date but before the financial statements are issued, what is the appropriate action?
A) Treat it as a Type I subsequent event and adjust the financial statements.
B) Treat it as a Type II subsequent event and disclose in the notes.
C) Ignore the error as it pertains to a past period.
D) Report the error as a prior period adjustment in the next year’s financial statements.

Answer 5

A) Treat it as a Type I subsequent event and adjust the financial statements.

Discovering a significant error in the inventory count for the reporting period after the balance sheet date but before the financial statements are issued is considered a Type I subsequent event. It provides additional evidence about conditions that existed at the balance sheet date and requires an adjustment to the financial statements to correct the error.

Question 6

FAR1A30002
Which of the following is a characteristic feature of the Statement of Comprehensive Income?
A. It includes only the cash transactions of a business.
B. It is prepared on a quarterly basis only.
C. It encompasses both realized and unrealized revenues and expenses.
D. It focuses solely on the operational activities of the business.

Answer 6

C. It encompasses both realized and unrealized revenues and expenses.

The Statement of Comprehensive Income includes all forms of income and expenses, both realized (from actual transactions) and unrealized (like changes in the fair value of assets).
Choice A is incorrect as it includes more than just cash transactions, incorporating accrual accounting as well. Choice B is incorrect because this statement can be prepared annually or quarterly. Choice D is incorrect as it includes financial activities beyond just operational ones.

Question 7

FAR3C10006
What is a key factor in determining whether a performance obligation is satisfied over time?
A. The time taken to manufacture the goods
B. The customer’s ability to pay for the goods or services
C. The customer’s simultaneous receipt and consumption of the benefits provided by the entity’s performance
D. The inventory levels of the entity

Answer 7

C. The customer’s simultaneous receipt and consumption of the benefits provided by the entity’s performance

A performance obligation is satisfied over time if the customer simultaneously receives and consumes the benefits as the entity performs. This is a key consideration in step five of the model.

Question 8

FAR1A20008
If a company’s trial balance shows a debit balance in its ‘Sales Returns and Allowances’ account, how should this be reflected in the income statement?
A) As an addition to sales revenue.
B) As a deduction from sales revenue.
C) As an operating expense.
D) As a non-operating expense.

Answer 8

B) As a deduction from sales revenue.

‘Sales Returns and Allowances’ are deducted from gross sales to calculate net sales, as they represent the return of goods by customers or allowances granted for damaged goods.
A) is incorrect because these are not added to sales revenue. C) and D) are incorrect as they are not classified as expenses.

Question 9

FAR2G10006
A company accrues interest payable of $2,000 on a loan. What is the impact on the company’s financial statements?
A) Increase in expenses, decrease in liabilities
B) Increase in liabilities, decrease in cash
C) Increase in liabilities, increase in expenses
D) Decrease in assets, increase in expenses

Answer 9

C) Increase in liabilities, increase in expenses

Accruing interest payable increases the Interest Expense (increasing expenses) and also increases the Interest Payable liability.

Question 10

FAR2C10039
What is the impact of not reconciling the inventory subledger with the general ledger regularly?
A. Increased inventory turnover ratio
B. Overstatement or understatement of inventory in financial statements
C. Reduced cost of goods sold
D. Inaccurate calculation of market value of inventory

Answer 10

B. Overstatement or understatement of inventory in financial statements

Failure to reconcile regularly can lead to misstated inventory values in the financial statements, affecting their accuracy and reliability.

Question 11

FAR3F10009
If a lessee is not reasonably certain to exercise a purchase option, how should the lease be accounted for?
A. The option payments should be included in the lease liability.
B. The lease payments should exclude the option payments.
C. The purchase option should be recognized as a separate liability.
D. The lease should be classified as a finance lease.

Answer 11

B. The lease payments should exclude the option payments.

If a lessee is not reasonably certain to exercise a purchase option, the payments for the option should be excluded from the lease liability. The lease liability should only include payments that are unavoidable.

Question 12

FAR3F10034
If a lessee’s lease liability decreases over the lease term, how does this impact the total lease cost recognized in the income statement?
A. Increases over time.
B. Decreases over time.
C. Remains constant throughout the lease term.
D. Fluctuates based on variable lease payments.

Answer 12

B. Decreases over time.

As the lease liability decreases over time due to lease payments, the interest expense portion of the lease cost also decreases. Therefore, the total lease cost recognized in the income statement typically decreases over the lease term.

Question 13

FAR1A40032
What is a common cause of discrepancies in the statement of changes in equity?
A) Incorrect classification of equity and liabilities.
B) Miscalculation of total assets.
C) Errors in external auditor’s reports.
D) Changes in market share value.

Answer 13

A) Incorrect classification of equity and liabilities.

Discrepancies often arise from incorrect classification between equity and liabilities. For example, a long-term loan may be incorrectly classified as equity. Miscalculating total assets (Option B) impacts the balance sheet more directly than the statement of changes in equity. Errors in external auditor’s reports (Option C) are less common and typically identified before finalizing financial statements. Changes in market share value (Option D) affect stock prices, not the statement of changes in equity directly.

Question 14

FAR1A20038
A U.S. company issues a bond payable in Euros. If the Euro weakens against the Dollar, what is the transaction effect?
A) A transaction gain on the bond payable.
B) A transaction loss on the bond payable.
C) No effect on the transaction.
D) The effect depends on the interest rate of the bond.

Answer 14

A) A transaction gain on the bond payable.

A weakening Euro against the Dollar means the company will pay less in Dollar terms to settle the Euro-denominated bond payable, resulting in a transaction gain.

Question 15

FAR1B10002
Which of the following best describes ‘net assets’ in the statement of financial position of a nongovernmental, not-for-profit entity?
A) The total amount of assets minus liabilities
B) The total cash available at the end of the year
C) The sum of all physical assets like buildings and equipment
D) The total amount of grant money received in a year

Answer 15

A) The total amount of assets minus liabilities

Net assets in the statement of financial position represent the residual interest in an entity’s assets after deducting its liabilities. This is akin to equity in for-profit organizations.

Question 16

FAR1A20025
If a company failed to record the write-down of inventory, the necessary adjustment in the income statement would be to:
A) Increase the cost of goods sold.
B) Decrease the cost of goods sold.
C) Increase operating income.
D) No adjustment needed as inventory write-downs affect only the balance sheet.

Answer 16

A) Increase the cost of goods sold.

A write-down of inventory should be reflected as an increased cost of goods sold, affecting net income.
B) is incorrect as it decreases cost of goods sold, which is contrary to the needed adjustment. C) is incorrect as the write-down decreases, not increases, operating income. D) is incorrect because inventory write-downs affect both the balance sheet and the income statement.

Question 17

FAR1A40023
In the case of an understatement of expenses in the previous year, how should it be corrected in the statement of changes in equity?
A) By reducing the current year’s expenses.
B) By increasing the current year’s retained earnings.
C) By decreasing the opening balance of retained earnings.
D) By adjusting the current year’s total equity.

Answer 17

C) By decreasing the opening balance of retained earnings.

An understatement of expenses in the previous year should be corrected by decreasing the opening balance of retained earnings in the current year’s statement of changes in equity.
It is not corrected by reducing the current year’s expenses (Option A) or increasing the current year’s retained earnings (Option B). Adjusting the current year’s total equity (Option D) is a broader action that may result from this correction, but the specific adjustment is in the opening balance of retained earnings.

Question 18

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $100,000. What amount of gain should Damon report related to this transaction?
A. $25,000
B. $100,000
C. $50,000
D. $40,000

Answer 18

D. $40,000

To find Damon’s gain, you figure out the fair value of the net assets acquired, and subtract the costs of the investment. But, remember that the acquisition costs are expensed when incurred and are not part of the costs of the investment. The ‘contingent consideration’ IS part of the investment cost.
Net assets acquired: $350,000 – 100,000 = $250,000
Cost of the investment: $200,000 + 10,000 = $210,000
Gain: $40,000

Question 19

When there is a change in the reporting entity, how should the change be reported in the financial statements?
A. Prospectively, including note disclosures.
B. Retrospectively, including note disclosures, and application to all prior period financial statements presented.
C. Currently, including note disclosures.
D. Note disclosures only.

Answer 19

B. Retrospectively, including note disclosures, and application to all prior period financial statements presented.

A change in reporting entity is treated similar to a change in accounting principle, meaning it is reported retrospectively.

Question 20

investments that are eligible or required to be reported at fair value in the financial statements

Answer 20

● Marketable Securities: These include stocks, bonds, or any other securities that are readily traded in the financial markets. GAAP requires these to be reported at fair value because their market value can be reliably determined.
● Derivatives: Financial instruments like options, futures, and swaps are required to be reported at fair value. This is because their value is directly linked to the value of an underlying asset, rate, or index, and can fluctuate over time.
● Trading Securities: Investments held for the purpose of selling in the near term for a profit are classified as trading securities. These must be reported at fair value, with
changes in value recognized in earnings. both realized and unrealized gains and losses affect net income
● Available-for-Sale Securities: These are securities not classified as trading securities or held-to-maturity investments. They are reported at fair value, but unlike trading securities, the unrealized gains or losses are
generally recorded in other comprehensive income rather than earnings except for the realized gains and losses and interest
or dividends.
● Held-to-Maturity Securities: These are generally reported at amortized cost, but if the fair value is readily available and the entity elects the fair value option under GAAP, they can be reported at fair value. Interest income from these securities is recognized in net income. interest income affects net income, and changes in fair value are not recognized

Question 21

derivatives’ fair value can be calculated

Answer 21

using a pricing model like Black-Scholes
the fair value of the derivative, which
might involve complex calculations based on market prices, interest rates, volatility, and other market factors

Question 22

trading securities’ any unrealized gains or losses (difference between the cost and current market value) are recognized in

Answer 22

earnings
Example: If a trading security was bought for $8,000 and now has a market value of $10,000, the carrying amount is $10,000, and the unrealized gain of $2,000 is reported in earnings

Question 23

available for sale securities’ Unrealized gains or losses are recorded in

Answer 23

other comprehensive income, not in earning.
Example: A security bought for $12,000 now worth $15,000 is carried at $15,000, with the $3,000 unrealized gain reported in other comprehensive income.

Question 24

To calculate investment income to be recognized in net income for investments measured at fair value, and to prepare the
corresponding journal entries, we need to understand the type of investment and how its changes in fair value are treated under GAAP (Generally Accepted Accounting Principles). The income
recognition and journal entries will differ based on

Answer 24

whether the investment is classified as a trading security, available-for-sale security, or held-to-maturity security

Question 25

equity securities impairment process differs from that used for debt securities or loans, primarily because

Answer 25

equity securities do not have contractual cash flows, and their value is more directly tied to the performance and valuation of the underlying business

Question 26

FAR2G10005
A company has accrued vacation pay of $8,000. This represents:
A) A future economic benefit to the company
B) A present obligation arising from past events
C) A contingent liability
D) An equity reduction

Answer 26

B) A present obligation arising from past events

Accrued vacation pay is a liability representing a company’s obligation to pay for employee vacation time earned in the past.

Question 27

FAR1E10028
How are prepaid expenses recorded in modified cash basis accounting?
A) Expensed over the period of benefit.
B) Expensed when paid.
C) Not recorded until used.
D) Capitalized as a long-term asset.

Answer 27

A) Expensed over the period of benefit.

In modified cash basis accounting, prepaid expenses are often treated similarly to accrual accounting, being expensed over the period they benefit.

Question 28

FAR2E007n
Thomas Inc made a 30% investment in Jefferson Company. The investment gave Thomas the ability to exercise significant influence over Jefferson. If Jefferson reports net income and pays dividends during the year, how would Thomas’s accounting for the investment differ under the equity method vs making the fair value election?

A. If Thomas elects to use the fair value option, any dividends received from Jefferson would decrease the investment account on Thomas’s books.
B. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would decrease the investment account on Thomas’s books.
C. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would increase the investment account on Thomas’s books.
D. If Thomas uses the equity method, any dividends received from Jefferson will decrease the investment account on its books.

Answer 28

D. If Thomas uses the equity method, any dividends received from Jefferson will decrease the investment account on its books.

Under the equity method, Thomas’s portion of Jefferson’s income would increase the investment account on Thomas’s books, and dividends from Jefferson would decrease this same investment account and are not considered income.
Under the fair value method, changes in the fair value of the investment (stock price) will be reflected in income for the period, and any dividends received are included in income for the period. Thomas would not report any changes on the investment based on the results of Jefferson’s operations, like it would under the equity method.

Question 29

FAR2I10007
How is a stock dividend recorded when it’s more than 25% of the existing shares?
A) Debit Retained Earnings, Credit Common Stock Dividend Distributable, Credit Common Stock
B) Debit Retained Earnings, Credit Common Stock
C) Debit Common Stock Dividend Distributable, Credit Retained Earnings
D) Debit Retained Earnings, Credit Common Stock Dividend Distributable

Answer 29

B) Debit Retained Earnings, Credit Common Stock

Question 30

FAR1B010nsim

JRM co. is in the process of closing its books for the year ended December 31, year 2.

The following business events are not properly reflected in JRM’s December 31, year 2, unadjusted trial balance:

The controller determined that half of the recorded rent expense of $10,000 is attributable to year 3.

JRM depreciates its property, plant, and equipment using the straight-line method over 10 years. The property, plant, and equipment had an original cost of $20,000 and a salvage value of $5,000.

JRM uses the percentage-of-sales method to determine the addition to bad debt expense. Uncollectible accounts receivable for year 2 was estimated to be 0.25%.

On December 31, year 2, a customer declared bankruptcy and its accounts receivable of $855 is uncollectible.

Life insurance premiums for the period ended December 31, year 2, of $650 for key members of management are included in prepaid expenses.

Interest of $300 was earned and outstanding on notes receivable during year 2. The note receivable is due at the end of year 5.

Income taxes for year 2 are estimated to be $3,000.

Sales made during year 2 totaled $300,000.

Based on the business events above, calculate the net adjusted balance for the allowance for doubtful debt account. The trial balance shows a credit balance of $2,500 for the allowance for doubtful debt account.

A. $2,395
B. $2,605
C. $855
D. $750

Answer 30

A. $2,395
855 is uncollectible
0.0025 of 300000 is also uncollectible = 750

855 - 750 = 105

2500 - 105 = 2395
According to the business events given, a customer has declared bankruptcy on December 31, year 2. The customer balance of $855 is not collectible. Hence the accounts receivable account balance should be reduced by the uncollectible amount and debit should be given to the allowance for doubtful debt account.

JRM uses the percentage-of-sales method to determine the addition to bad debt expenses. Uncollectible accounts receivable for year 2 was estimated to be 0.25% of the sales amount of $300,000. Therefore, additional provision to be made to the doubtful debt account is $750.

Therefore the allowance for doubtful debt should be given an adjustment debit of $855 to reflect the bad debt and credited to the extent of $750 to made provision for the current year sales. This would result in the net adjusted trial balance of $2,395 in credit balance for the account.

Question 31

FAR2B10020
A company sells its receivables to a bank but continues to collect the receivables on behalf of the bank. This arrangement is best described as:
A) Pledging
B) Assignment
C) Secured borrowing
D) Factoring

Answer 31

D) Factoring

This arrangement is a form of factoring, where the company sells its receivables to a financial institution (factor) but may continue to manage collections on behalf of the factor.

Question 32

FAR3C10021
When a not-for-profit entity receives assets on behalf of a third party, under which condition are these assets not recognized as contributions?
A. When the assets are intended for specific program services
B. When the not-for-profit entity has variance power
C. When the assets are restricted for a specific purpose by the donor
D. When the not-for-profit entity lacks discretion over the use of the assets

Answer 32

D. When the not-for-profit entity lacks discretion over the use of the assets

Assets received by a not-for-profit entity acting merely as an agent or intermediary and lacking discretion over their use are not recognized as contributions.

Question 33

An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a
A. Noncurrent liability
B. Current liability
C. Noncurrent asset
D. Current asset

Answer 33

C. Noncurrent asset

It is a noncurrent asset, because in general, plan assets wouldn’t be liquidated within one year.

Question 34

FAR1B20025
If a capital donation was incorrectly recorded as operating revenue, what is the appropriate adjustment?
A) Reclassify it from operating to non-operating revenue
B) Transfer it from net assets to liabilities
C) Record it as an increase in fixed assets
D) Decrease unrestricted net assets and increase temporarily restricted net assets

Answer 34

A) Reclassify it from operating to non-operating revenue

Capital donations should be classified as non-operating revenue. This adjustment correctly reflects the nature of the donation.

Question 35

FAR2G10036
Which of the following is a key step in reconciling the accounts payable subledger with the general ledger?
A) Reviewing and matching individual vendor balances in the subledger with the total accounts payable in the general ledger.
B) Comparing the total sales recorded in the subledger with the general ledger.
C) Reconciling the total fixed assets in the subledger with the general ledger.
D) Matching the total equity recorded in the subledger with the general ledger.

Answer 35

A) Reviewing and matching individual vendor balances in the subledger with the total accounts payable in the general ledger.

A key step in reconciling accounts payable is to review and match individual vendor balances in the subledger with the consolidated total accounts payable balance in the general ledger. This ensures accuracy and completeness.

Question 36

FAR2I001aicpa
Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?
A. $0
B. $100
C. $300
D. $400

Answer 36

B. $100

Under the par value method for treasury stock, the APIC (additional paid-in capital) account is decreased by the amount it was credited for on that amount of stock when the stock was originally issued. This stock was issued at $7 per share and a $6 par, so that put $1 into APIC for every share issued. So, when 100 shares are acquired as treasury stock, $1 is taken back out of the APIC account, or $100.

Question 37

FAR1A60032
In case of an error in the calculation of the minority interest in previous consolidated financial statements, the appropriate action is to:
A. Adjust the minority interest in the current year’s balance sheet
B. Restate the affected year’s consolidated balance sheet
C. Record the adjustment in the parent company’s equity
D. Leave the previous statements as they are and disclose the error in the current year’s notes

Answer 37

B. Restate the affected year’s consolidated balance sheet

An error in the calculation of minority interest in prior years should be corrected by restating the affected year’s consolidated balance sheet. This ensures that the financial statements accurately reflect the interests of minority shareholders.

Question 38

FAR1B20017
Which account from a trial balance is not typically included in a not-for-profit entity’s statement of activities?
A) Investment Income
B) Office Supplies Expense
C) Building and Equipment
D) Fundraising Expenses

Answer 38

C) Building and Equipment

‘Building and Equipment’ is not typically included in the statement of activities as it is a balance sheet item, representing assets, not revenue or expenses.

Question 39

FAR1A60016
In an intercompany transaction, if Sparrow Inc. sells equipment with an original cost of $350,000 and accumulated depreciation of $200,000 to Falcon Ltd. for $250,000, what would the equipment be reported at on the consolidated balance sheet?
A. $350,000
B. $250,000
C. $150,000
D. $200,000

Answer 39

C. $150,000

During consolidation, the equipment’s value is revalued to Sparrow’s carrying amount, which is the original cost of the equipment ($350,000) minus the accumulated depreciation ($200,000). Therefore, the equipment would be reported at $150,000 on the consolidated balance sheet.

This process eliminates any intercompany gain on the transaction and ensures that the consolidated financial statements accurately reflect the financial situation of the combined entity.

Question 40

FAR2D10052
How should the disposal of an asset be reflected in a PPE rollforward analysis?
A. As an addition to the opening balance
B. As a deduction from the closing balance
C. As a reduction from the opening balance
D. As a separate line item showing the disposal amount

Answer 40

D. As a separate line item showing the disposal amount

Disposals should be shown as a separate line item in a PPE rollforward analysis, reflecting the amount removed from the PPE account due to the disposal.

Options A and C are incorrect as disposals are not additions or reductions to opening balances. Option B is incorrect as it’s not a deduction from the closing balance, but a separate transaction during the period.

Question 41

FAR2C004n
Spencer Co. shipped inventory on consignment to Adam Inc. that cost $100,000. Adam paid $1,000 for advertising that Spencer reimbursed. By the end of the year Adam had sold 50% of the inventory for $90,000. The agreement stated that Adam would be paid 30% commission on all sales. What is the ending inventory amount Spencer will list on their balance sheet at year end?
A. $42,000
B. $43,000
C. $50,000
D. $93,000

Answer 41

C. $50,000

The pertinent facts of this problem are that the inventory cost $100,000 and that 50% of it has been sold for an ending inventory value of $50,000. It was on consignment so Spencer is still the owner, and the commissions and advertising don’t affect the inventory value.

Question 42

FAR2E20003
Which type of investment is ineligible for reporting at amortized cost?
A) Debt securities with fixed maturities and fixed or determinable payments.
B) Shares of publicly traded companies.
C) Loans issued by the company.
D) Government bonds with a specified maturity date.

Answer 42

B) Shares of publicly traded companies.

Shares of publicly traded companies are equity instruments, and equity instruments are generally not reported at amortized cost. Amortized cost accounting is more appropriate for debt instruments with fixed or determinable payments and a fixed maturity.

Question 43

certain types of investments can be reported at amortized cost in the
financial statements. This treatment is typically reserved for

Answer 43

debt instruments, where the investor has the intent and ability to hold the investment until maturity such as held to maturity securities, loans and receivables,

Question 44

Held-to-maturity investments are
not adjusted to their fair value in each reporting period. Instead,

Answer 44

they remain at amortized cost unless impaired

Question 45

Under GAAP, the ability to report investments at amortized cost rather than fair value provides a way to recognize

Answer 45

the economic benefits of holding certain types of debt investments to maturity, without the volatility that might arise from periodic fair value adjustments

Question 46

Calculating the carrying amount of investments measured at amortized cost and preparing the corresponding journal entries, excluding impairment, involves a few steps. This process is typically applied to held-to-maturity securities and certain loans and receivables under GAAP (Generally Accepted Accounting Principles).

Answer 46

The key is to adjust for the amortization of any discount or premium over the life of the investment

Question 47

The Credit Loss Expense is recognized in the income statement, impacting net income. The Allowance for Credit Losses is a contra-asset account that appears on the balance sheet and reduces the carrying amount of the AFS security

Question 48

the equity method of accounting is applied to investments in certain circumstances, primarily

Answer 48

when an investor has significant influence over the investee by an ownership interest of approximately 20% to 50% of the
voting stock of the investee, but does not have control, as would be the case with a majority ownership

Question 49

When an investor uses the equity method, it records the investment initially

Answer 49

at cost and subsequently adjusts this amount for its share of the investee’s profits or losses, and dividends received.