At the beginning of 2014, Trichet Inc. purchased a 27% stake in the ordinary shares of Papandreou Company at a cost of €4,000,000. After applying the equity method, the Investment in Papandreou account has a balance of €4,020,000. At December 31, 2014 the fair value of the investment is €4,130,000. Which of the following values is acceptable for Trichet to report for the investment in its December 31, 2014 statement of financial position? I. €4,000,000
II) €4,020,000
III) €4,130,000

Question

Quizplus · Accepted Answer

Under the equity method, the initial investment is recorded at cost and subsequently adjusted for changes in the investee's net assets and income or loss. The balance in the Investment in Papandreou account at December 31, 2014 is €4,020,000, which reflects the initial cost of €4,000,000 plus Trichet's share of Papandreou's net income for the year.

However, the fair value of the investment at December 31, 2014 is €4,130,000, which represents a potential increase in value since the initial purchase. This increase in value is not recognized in the financial statements under the equity method, as it reflects changes in market conditions rather than changes in the investee's underlying performance.

Therefore, Trichet could report either the carrying value (€4,020,000) or the fair value (€4,130,000) for the investment in its December 31, 2014 statement of financial position. Choice D is the best answer as it includes both possible options.

At the Beginning of 2014, Trichet Inc