An investor company owns 40% of the shares in an investee.If this investment is being accounted for using the equity method of accounting and the investee reports a net loss of $80,000 for the year,the following will result:

Question

Quizplus · Accepted Answer

Under the equity method of accounting, a portion of the investee's net income or loss is attributed to the investor based on their ownership percentage. Since the investor company owns 40% of the investee, the investor will recognize 40% of the investee's net loss, which is $32,000 (40% x $80,000). This will result in a decrease in the long-term investment account by the same amount, hence Choice A is the correct answer.

An Investor Company Owns 40% of the Shares in an Investee.If