Company P Company uses the equity method to account for its January 1, 20X1, purchase of 30% of Company S's common stock.On January 1, 20X1, the market values of Company S's FIFO inventory and land exceed their book values.How do these excesses of market values over book values affect Company P's reported equity in Company S's 20X1 earnings?
Inventory Excess Land Excess
A)Decrease Decrease
B)Decrease No effect
C)Increase Increase
D)Increase No effect

Question

Company P Company uses the equity method to account for its January 1, 20X1, purchase of 30% of Company S's common stock.On January 1, 20X1, the market values of Company S's FIFO inventory and land exceed their book values.How do these excesses of market values over book values affect Company P's reported equity in Company S's 20X1 earnings? ​
Inventory Excess Land Excess
A)Decrease Decrease
B)​Decrease No effect
C)​Increase Increase
D)​Increase No effect

Quizplus · Accepted Answer

The excess of market value over book value for inventory will decrease Company P's reported equity in Company S's earnings because the higher inventory cost will lead to higher cost of goods sold and lower earnings. The excess land value does not affect the current period's earnings because land is not depreciated.

Company P Company Uses the Equity Method to Account for Its