When the equity method of accounting for investments is used by the investor, the investment account is increased when:
A) A cash dividend is received from the investee.
B) The investee reports net income for the year.
C) The investor records additional depreciation related to the investment.
D) The investee reports a net loss for the year.

Question

Quizplus · Accepted Answer

Under the equity method, the investor's share of the investee's net income is added to the investment account to reflect the investor's increase in ownership interest. The receipt of cash dividends (choice A) reduces the investment account, and the recognition of additional depreciation (choice C) reduces the investor's share of the investee's net income. A net loss reported by the investee (choice D) would reduce the investment account, as the investor's ownership interest in the investee would have decreased.

When the Equity Method of Accounting for Investments Is Used