Accounting Methods for Investments in Subsidiaries Quiz

Investors typically use the cost method when they have no significant influence over the investee.

The initial investment is recorded at cost under the equity method.

Equity method is used when an investor has significant influence over the investee.

Dividends received from the investee are accounted for as a reduction of the investment account under the equity method.

The investment in subsidiary under the equity method is reflected on the balance sheet.

The primary difference lies in the recognition of investee's net income.

The financial statements are combined by eliminating intercompany transactions and balances in the consolidation method.

The equity method of accounting for investments is governed by Generally Accepted Accounting Principles (GAAP).

Changes in the investee's net income are recognized by the investor as a direct increase to the investment account under the equity method.

Changes in the fair value of the investment are recognized as a reduction of the investment account under the cost method.

Investors discontinue using the equity method when the investee becomes a subsidiary.

Unrealized gains or losses on intercompany transactions are eliminated in consolidation under the equity method.

Adjustments for changes in the investee's net assets are recognized as a separate line item in the equity section under the equity method.

The carrying value of an investment under the equity method decreases if the investor records a share of the investee's losses.