Question

A corporation that uses the equity method of accounting for its investment in a 40%-owned investee (that earned $20,000 and paid $5,000 in dividends) made the following entries: Investment in investee $8,000 Investment Income $8,000 Investment in investee $2,000 Cash $2,000 What effect will these entries have on the investor’s statement of financial position?

Answer 1

Answer:

Investment in the investee will be overstated, retained earnings will be overstated.

Explanation:

The effect on the investor’s statement of financial position is shown below:-

Because the investor owns more than 30 percent of the equity approach has to be used. This will result in overestimated investments of $8,000 which comes from $20,000 × 40 percent in investee, which will also result in overestimated retained earnings of $8,000 which comes from $20,000 × 40 percent