Judd, Inc., owns 35% of Cosby Corporation.During the calendar year 2012, 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 the equity method would increase the investment account by Judd's share of Cosby's net earnings. Net income and retained earnings would also be understated because the equity method would recognize Judd's share of Cosby's earnings, which was not done under the fair value method.

Judd, Inc, Owns 35% of Cosby Corporation