Dorr, Inc., owns 35% of Moik Corporation.During the calendar year 2011, Moik had net earnings of $300,000 and paid dividends of $30,000.Dorr mistakenly recorded these transactions using the cost 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

Understate, understate, understate. Using the cost method instead of the equity method would understate the investment account because the share of net earnings would not be added to the investment account. Net income and retained earnings would also be understated because the share of net earnings would not be recognized in income.

Dorr, Inc, Owns 35% of Moik Corporation