Question #47

- Luna has recorded its investment in Instate utilizing the equity method of accounting for intercorporate investments. According to FASB, which of the following statements most accurately reflects the impact on an investor's financial statements by using the equity method? A) The investing firm can include a proportionate share of the investee’s income in its earnings, regardless of whether or not there are actual cash flows (i.e. dividends). B) Market values can be compared with the carrying amount for analysis purposes, but only market values may be used in the financial statements. C) The investing firm will not make any adjustments to its financial statements to reflect its proportionate share of the investee’s net assets, but will reference the investment in the footnotes. The Anderson Company acquired 100,000 shares of the Birschbach Company on January 1, 2012, at $25 per share. The market price of a share of Birschbach stock on December 31, 2012, was $35 per share. During 2012, Birschbach paid dividends of $1.50 per share and had earnings of $2.50 per share. The Anderson Company did not buy or sell any additional shares in 2013. The market price of Birschbach stock on December 31, 2013 was $42.50 per share. During 2013 Birschbach paid dividends of $1.75 per share and had earnings of $2.25 per share.