Park Inc.owns 35 percent of Exeter Corporation.During the calendar year 2013, Exeter had net earnings of $300,000 and paid dividends of $36,000.Park mistakenly accounted for the investment in Exeter using the cost method rather than the equity method of accounting.What effect would this have on the investment account and net income, respectively?

Question

Quizplus · Accepted Answer

Using the cost method, dividends received from Exeter would be recorded as a reduction in the investment account rather than as income. Therefore, the investment account would be understated and net income would also be understated.

Park IncOwns 35 Percent of Exeter Corporation