Ben, Inc. follows U.S. GAAP for its external financial reporting. Ben, Inc. owns 25% of the outstanding stock of Black, Inc. and accordingly uses the equity method to account for its investment. Which of the following is true regarding Ben, Inc.'s policies related to Black, Inc.?
A) Ben, Inc. will increase the investment account for its pro-rata share of Black, Inc.'s net loss for the year.
B) Ben, Inc. will increase the investment account for its pro-rata share of the dividends paid out by Black, Inc. for the year.
C) Ben, Inc. will conform the accounting policies of Black, Inc. to its own accounting policies.
D) None of these is true regarding how Ben, Inc. accounts for its investment in Black, Inc.

Question

Quizplus · Accepted Answer

Under the equity method, Ben, Inc. will decrease the investment account for its pro-rata share of Black, Inc.'s net loss, not increase it. Dividends received from Black, Inc. will decrease the investment account, not increase it. Ben, Inc. does not need to conform Black, Inc.'s accounting policies to its own.

Ben, Inc Follows U