Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

Question

Quizplus · Accepted Answer

Using the cost method, Pine, Inc. would not adjust the investment account for its share of Supra's earnings, leading to an understatement. Dividends received would be recorded as income, not affecting net earnings or retained earnings, leading to an understatement of both.

Pine, Inc Owns 40% of Supra Corporation