Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

Question

Quizplus · Accepted Answer

Using the fair value method instead of the equity method would understate the investment account because Judd would not recognize its share of Cosby's earnings. Net income and retained earnings would also be understated because Judd would not include its share of Cosby's net earnings in its financial statements.

Judd, Inc, Owns 35% of Cosby Corporation