When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by
A)declines in the market value of the stock.
B)the earnings and dividends of the investee.
C)an excess of market price over cost.
D)neither the earnings nor the dividends of the investee.

Question

Quizplus · Accepted Answer

The equity method accounts for an investment in another company based on the investor's proportional share of the investee's earnings and dividends. Therefore, the carrying value of the investment is affected by the earnings and dividends of the investee. Option A, declines in the market value of the stock, may affect the value of the investment, but it is not the primary factor in the equity method. Option C, an excess of market price over cost, is not relevant as the equity method considers the investor's share of earnings and dividends, not the market price of the stock. Option D, neither the earnings nor the dividends of the investee, is incorrect as the equity method specifically considers the investor's share of these factors.

When the Equity Method Is Used to Account for a Long-Term