Cucumber Company concluded at the beginning of 2018 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment under the fair value through net income method, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as fair value through net income. At the time of implementing the change to the fair value through net income method, if financial statements were prepared:
A) Net income and retained earnings will be lower by $25,000.
B) Net income will be unchanged, and retained earnings will be lower by $25,000.
C) The accounts will be unchanged, because no adjustment is necessary.
D) Other comprehensive income and accumulated other comprehensive income will be lower by $25,000.

Question

Quizplus · Accepted Answer

The equity method balance becomes the new cost basis, but after the change, under FV through net income reporting, the investment must be marked to fair value with unrealized gains and losses shown in net income.

Cucumber Company Concluded at the Beginning of 2018 That the Company's