Q35704661
AID: 1825 | 27/03/2019
[Delimiter]
[General guidance]
[Section: Concepts and reason]
Accounting: Accounting is a process of recording the transactions, classifying them in a
specific manner, and then it is the process of summarizing, analyzing, and interpreting the
results. It is a process of preserving the accounts.
Equity method: An accounting technique used by the companies to determine the profits
that are earned by investments on another company are known as equity method. Any
investment is recorded in balance sheet.
[Section: Fundamentals]
Stock: An equal part or a portion of company’s capital which indicates ownership of the
holder in the company and that states that the shareholder has a claim in the profits and
the assets of the company is referred to as a share. A bundle of fully paid shares is
referred to as stock. The two main categories of stock are preferred stock and common
stock.
Dividends: Dividends are the divisible profits of a company that are issued to the
shareholder for the portion of share he has purchased. It should be through the way of
purchase in the company. They are an expense for the company.
Subsidiary company: A company that is influenced by other company is known as
subsidiary company. Holding company owns subsidiary company either fully or partially.
It is based on the portion of stock that the company has purchased. The company that has
purchased stock than other companies may have control over other companies.
[Delimiter]
[Starting Hint]
Based on the information given in the question, justify incorrect answers.
[Delimiter]
[Step 1]
Justify incorrect answers:
When the stock price of the affiliate company increases or decreases, it is not included in
the income statement. The price is considered only during the redemption or any other
issue or re-issue.
When the dividend is received, it will be changed on the financial position statement.
Therefore, the changes in stock price and receipt of the dividend from the affiliate
company are not used to record as revenue in the income statement.
[Explanation]
The income statement of the investor company can be changed only if the transaction
affects the revenue and expense of the investor. When stock price is increased or
decreased, there is no change in income statement. When the dividend is received, it
involves no changes as it influences the dividend and cash that are related to balance
sheet.
[Hint for next step]
Based on the information given in the question, determine the transaction that involves
change in the equity method of accounting to record revenue.
[Delimiter]
[Step 2]
Determine the transaction that involves change in the equity method of accounting to
record revenue.
When the affiliate company declares dividend, the investor company has to modify the
financial statement. If the dividend is declared by Affiliate Company, it has a change in
the income statement as the dividend declared will have change in the revenue section.
Therefore, revenue is recorded on the income statement of the investor company when a
dividend is declared by the affiliate company.
[Answer]
Revenue is recorded on the income statement of the investor company when a
dividend is declared by the affiliate company.
[Answer End]
[Answer Choice: Wrong]
Revenue is recorded on the income statement of the investor company when a dividend is
received from the affiliate company.
[Answer Choice End]
[Answer Choice: Wrong]
Revenue is recorded on the income statement of the investor company when the stock
price of the affiliate company increases.
