Explanation Equity Method: When the investor company subsequently adjusts the investment carrying amount for changes in the retained earnings of the investee company, that method of accounting is known as equity method. A company’s net assets are its equity, net assets increases when it earns net income and decreases when it declares dividends or incurs a net loss. The investor decreases the investment account by its shares of the dividends declared by the investee company. Working Note: Calculating total share of net income in the investee’s company: Share in Net Income = Net Income × Interest Rate

3rd Edition

ISBN: 9780136912644

Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella

Publisher: Pearson Education (US)

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Chapter 16, Problem 16.7MC

To determine

To identify: The correct option

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Chapter 16, Problem 16.6MC

Chapter 16, Problem 16.1BE

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Chapter 16 Solutions

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The correct option

Solution Summary: The author explains that option d is the correct option when the investor adjusts the investment carrying amount for changes in the retained earnings of the investee company.

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