An investor uses the equity method to account for an investment in common stock.

Question

An investor uses the equity method to account for an investment in common stock. Assume that (1) the investor owns more than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, and (3) the investee's net income is more than the dividends it declares. How would the investor's investment in the common stock of the investee company under the equity method differ at year-end from what it would have been if the investor had accounted for the investment under the cost method? The balance under the equity method is lower than it would have been under the cost method. The balance under the equity method is higher than it would have been under the cost method. The balance under the equity method is higher than it would have been under the cost method, but only if the investee company actually paid the dividends before year-end. The balance under the equity method is lower than it would have been under the cost method, but only if the investee company actually paid the dividends before year-end.

Explanation / Answer

3.a. The balance under the equity method is higher than It would have been under the cost method

4. Result in increased earnings per share.

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