Test 1

Question 1

Cost Method

Answer 1

• applied to investments without a readily determinable fair value
• investment remains at cost (unless a demonstrable impairment occurs or observable price change occurs for identical/similar investment
• income is recognized by investor for its share of investee dividends declared

Question 2

Fair Value Method

Answer 2

• investor ownership is less than 20%
• investor has the inability to significantly influence the investee
• investor records initial investment at fair value (FV)
• Investor records only proportionate (%) share of dividend income (recognized as income)
• no change to investor’s investment account (asset) for % income/loss of investee
• change in investment account due to change in fair market value at end of year