Analyzing and Interpreting Equity Method Investments Stober Company purchases an
ID: 2776811 • Letter: A
Question
Analyzing and Interpreting Equity Method Investments
Stober Company purchases an investment in Lang Company at a purchase price of $1.2 million cash, representing 30% of the book value of Lang. During the year, Lang reports net income of $110,000 and pays cash dividends of $50,000. At the end of the year, the fair value of Stober's investment is $1.25 million.
c. Stober's $200,000 unrealized gain in investment fair value (choose one):
(1) Is not reflected on either its income statement or balance sheet
(2) Is reported in its current income
(3) Is reported on its balance sheet only
(4) Is reported in its other comprehensive income
The answer was not (4)
f. Record each of the transactions from d in the financial statement effects template.
Explanation / Answer
The equity method of accounting does not consider changes in market value and it does not report investments at market value. Therefore, the unrealized gain of 200,000 due to changes in market value will not be reflected in either in income statement or balance sheet.
Therefore, option (1) is correct