Under the Equity Method, which of the following statements is TRUE?
A) The parent's investment in the subsidiary is recorded at cost, and only changed thereafter if there has been a permanent impairment in the value of the investment.
B) The parent records its pro rata share of the subsidiary's post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
C) The parent records its pro rata share of the subsidiary's cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
D) The parent's investment in the subsidiary is recorded at cost and reduced by any excess dividends received from the subsidiary.

Question

Quizplus · Accepted Answer

Under the equity method, the parent records its proportionate share of the subsidiary's post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary. Therefore, option B is the correct statement. Option A is incorrect because the parent's investment in the subsidiary is adjusted annually for its proportionate share of the subsidiary's earnings or losses rather than being recorded at cost. Option C is incorrect because it mentions cumulative earnings, which is not the correct treatment under the equity method. Option D is incorrect because excess dividends do not reduce the cost of the investment but are recognized as dividend income.

Under the Equity Method, Which of the Following Statements Is