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

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 higher than it would have been under the cost method. 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. 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. 10. Required information

4. A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation? Decrease book value per share. Result in an increased current ratio. Result in increased earnings per share. Increase asset turnover ratios.

Explanation / Answer

Under question 1 , balance of investment under equity method will be higher in comparison to value under cost method

Reason for this being under equity method investor company increases its investment by proportionate share of net income and then reduces proportionate amount of dividend recieved.

Under given situation it has been stated that dividend issued is lesser than net income so amount added to investment will be higher then the amount reduced form investment.

question 2 Results in increased earnings per share

As proportionate share in net income of investee will be added to income of investor, thereby increasing earnings per share

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.