If an investment accounted for using the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, what accounting entry should be made?

Question

Quizplus · Accepted Answer

Under the equity method, if an investment suffers an impairment loss, it is recorded as a reduction in the carrying amount of the investment. If the value in use subsequently recovers, the investment may be written up in value, but not more than the amount of the impairment loss that was recorded at the time of impairment. This is known as the "upper limit" rule. The rationale for this rule is that, if the impairment loss was based on a decline in the investee's operations or cash flows, the recovery should be limited to the amount of the original impairment loss. This ensures that the investment is not carried at a value that exceeds its recoverable amount. Therefore, option B is correct as it is the appropriate accounting treatment in accordance with the upper limit rule. The other options are not correct as they do not reflect the upper limit rule.

If an Investment Accounted for Using the Equity Method Suffers