When the cost method is used to account for an investment thecarring value of th

Question

When the cost method is used to account for an investment thecarring value of the investment is affected by: a)the dividend distribution of the investee b)the periodic net income of the investee c)the earnings and dividend distribution by the investee d) neither the earnings nor dividends of the investee When the cost method is used to account for an investment thecarring value of the investment is affected by: a)the dividend distribution of the investee b)the periodic net income of the investee c)the earnings and dividend distribution by the investee d) neither the earnings nor dividends of the investee

Explanation / Answer

Cost Method of Accounting forInvestments
Cost method of accounting for investments are used in theinternal firm product or service costing (accounting). The original cost of the investment, that is the historicalcost which was paid for the investment, when it was first bought,is the one that is recorded in the balance sheet. -Once the balance sheet entry has been made, no furtheradjustments and changes are required to be made, unless the fairmarket value of the investment drops to such an extent that thereis doubt over any kind of possible recovery. Under such acircumstance, a permanent write off of the investment ismade. -If any dividends are declared on the investment in question,the dividends are recoredd like normal dividends and the usualaccounting entries are passed for the same. -Any undistributed earnings on the investments are notrecorded in the owner's balance sheet and hence have no effect onthe final balance sheet, per se. -The consolidation process under the cost method of accountingrequires that both, the investment account and the dividendaccount, be eliminated completely when the parent and thesubsidiary consolidate their accounts. You can use accountingsoftware to aid with the consolidation process. -It is important to note here that no matter which method ofaccounting is used (cost or equity), the consolidated financialstatements will be identical for both.
Thus going by above, carrying value of investment is affectedby (a) The dividend distribution of the investee

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