Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.


Answer: a reduction of the carrying value of the investment

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method Equity Method


a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income


Answer: Income A reduction of the investment

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
d. The investor should always use the fair value method to account for its investment.


Answer: The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee