Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015?
I.$3,000,000
II.$3,040,000
III.$3,120,000

Question

Quizplus · Accepted Answer

Under the equity method, Dublin records its investment in Club Company at cost initially and then adjust it based on the proportional share of income or loss of Club Company. The Investment in Club Company account has a balance of $3,040,000, which means Dublin's share of Club Company’s net income is $40,000.

However, the fair value of the investment at December 31, 2015, is $3,120,000, which is higher than the carrying value of the investment. According to accounting standards, if the fair value of an investment is higher than its carrying value, the investor should recognize the unrealized gain in the income statement as a separate item.

Therefore, Dublin can use either $3,040,000 (carrying value) or $3,120,000 (fair value) in its balance sheet at December 31, 2015. Answer D is correct because it includes both choices.

Dublin Company Holds a 30% Stake in Club Company Which