Question

Club Co. appropriately uses the equity method to account for its investment in ChipCorp. As of the end of 2013, Chip's common stock had suffered a significant declinein fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value? A. Club should switch to the fair-value method.B.No accounting because the decline in fair value is temporary.C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.D. Club should not record its share of Chip's 2013 earnings until the decline in the fair value of the stock has been recovered.E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

Answer 1

Answer:

C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.

Explanation:

Club SHOULD account for the decline in value by decreasing the balance in the investment account because it is stated in IAS 28 that when the 'carrying amount' which is the book value of an investment in an another company's shares exceeds the amount at which that investment can be disposed which is its 'recoverable amount', an impairment loss is recognized. The loss should be posted directly to the investment account.

Hence the investment account will be credited and the corresponding debit will go to the income statement.