question archive Which of the following results in a decrease in the investment account when applying the equity method? a
Which of the following results in a decrease in the investment account when applying the equity method? a
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Which of the following results in a decrease in the investment account when applying the equity method?
a. Net income of the investor
b. Net income of the investee
c. Unrealized gain on intercompany inventory transfers for the current year
d. Dividends paid by the investor
e. Purchase of additional common stock by the investor during the current year
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Answer.
c.Unrealized gain on intercompany inventory transfers for the current year
Under the equity method, the transfers between the holding and subsidiary company shall be eliminated. This includes transaction like transfer of stocks to parent by the subsidiary company and vice versa. The profit component in such sale shall be eliminated and hence the investment income of parent decline in such case. So, the correct option is ( c)
