Question #77
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 34
Status: Unattempted
Correct Answer: A
Part of Context Group: Q77-79
First in Group
Shared Context
Question
If Flitenight were to account for its Rocky Mountain investment as an investment in financial assets instead of the equity method, Flitenight's 2004 income statement would reflect its investment in Rocky Mountain by including which of the following?
Answer Choices:
A. Nothing, since the cost of the acquisition is not adjusted until the asset is sold
B. Only income of $200,000
C. Only a loss of $160,000
Explanation
If Flitenight accounted for its Rocky Mountain investment as an investment in financial
assets, in 2004 it would record on its income statement $200,000 (= $1 million × 0.2) in
dividends. That method would not be a permissible choice for Flitenight, however, since it
controls more than 20% of Rocky Mountain.