Chapter 4, Problem 4.1Q

When is the carrying value of the investment account reduced under equity-method reporting?

To determine

Equity Method:

The equity method is used by the investing entity to record its investment in the investee entity. In this method, the investing company records its share in the profit of the investee company in its income statement. The investment value is also adjusted with the amount of share in profit or loss.

The equity method is applied only when the investing entity has significant influence over the investee entity.

To indicate: The situation when the carrying value of the investment account is reduced under the equity method reporting.

Explanation of Solution

The equity method is applied by the investing company to record the investment made in the investee company. Under this method, the investment account is adjusted with the share in profit or loss reported by the investee company. The value of the investment increases in the case of profit and decreases in case of loss reported.

Hence, under the equity method reporting, the carrying value of the investment account is reduced in case of loss reported by the investee entity.