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P Corporation owns a 80% interest in S Company, acquired several years ago at a cost equal to book value and fair value. S sells merchandise to P for loss the first time in 2014, and some is unsold at December 31, 2014. In computing income from the investee for 2014 under the equity method, P uses which equation? Select one: a. 80% of S income less 80% of the unrealized loss in P ending inventory b. 80% of S income plus 80% of the unrealized loss in P ending inventory c. 80% of S income less 100% of the unrealized loss in P ending inventory d. 80% of S income plus 100% of the unrealized loss in P ending inventory

P Corporation owns a 80% interest in S Company, acquired several years ago at a cost equal to book value and fair value. S sells merchandise to P for loss the first time in 2014, and some is unsold at December 31, 2014. In computing income from the investee for 2014 under the equity method, P uses which equation? Select one: a. 80% of S income less 80% of the unrealized loss in P ending inventory b. 80% of S income plus 80% of the unrealized loss in P ending inventory c. 80% of S income less 100% of the unrealized loss in P ending inventory d. 80% of S income plus 100% of the unrealized loss in P ending inventory

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Accounting Exam Question on Equity Method **Scenario:** P Corporation owns an 80% interest in S Company, acquired several years ago at a cost equal to book value and fair value. S Company sells merchandise to P Corporation at a loss for the first time in 2014, and some of this merchandise remains unsold as of December 31, 2014. In computing income from the investee for 2014 under the equity method, P Corporation uses which equation? **Select one:** - a. 80% of S income less 80% of the unrealized loss in P ending inventory - b. 80% of S income plus 80% of the unrealized loss in P ending inventory - c. 80% of S income less 100% of the unrealized loss in P ending inventory - d. 80% of S income plus 100% of the unrealized loss in P ending inventory --- ### Explanation of Options - **Option a**: Calculates P's share of S's income by reducing it by P's share of the unrealized loss in ending inventory. - **Option b**: Calculates P's share of S's income by increasing it by P's share of the unrealized loss in ending inventory. - **Option c**: Calculates P's share of S's income by reducing it by the full amount of the unrealized loss in ending inventory. - **Option d**: Calculates P's share of S's income by increasing it by the full amount of the unrealized loss in ending inventory. This question assesses understanding of handling unrealized losses on inventory transactions between parent and subsidiary companies under the equity method of accounting.
Transcribed Image Text:### Accounting Exam Question on Equity Method **Scenario:** P Corporation owns an 80% interest in S Company, acquired several years ago at a cost equal to book value and fair value. S Company sells merchandise to P Corporation at a loss for the first time in 2014, and some of this merchandise remains unsold as of December 31, 2014. In computing income from the investee for 2014 under the equity method, P Corporation uses which equation? **Select one:** - a. 80% of S income less 80% of the unrealized loss in P ending inventory - b. 80% of S income plus 80% of the unrealized loss in P ending inventory - c. 80% of S income less 100% of the unrealized loss in P ending inventory - d. 80% of S income plus 100% of the unrealized loss in P ending inventory --- ### Explanation of Options - **Option a**: Calculates P's share of S's income by reducing it by P's share of the unrealized loss in ending inventory. - **Option b**: Calculates P's share of S's income by increasing it by P's share of the unrealized loss in ending inventory. - **Option c**: Calculates P's share of S's income by reducing it by the full amount of the unrealized loss in ending inventory. - **Option d**: Calculates P's share of S's income by increasing it by the full amount of the unrealized loss in ending inventory. This question assesses understanding of handling unrealized losses on inventory transactions between parent and subsidiary companies under the equity method of accounting.
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