Analyzing and Interpreting Equity Method Investments: Stober Company purchases a

Question

Analyzing and Interpreting Equity Method Investments:

Stober Company purchases an investment in Lang Company at a purchase price of $2 million cash, representing 30% of the book value of Lang. During the year, Lang reports net income of $200,000 and pays cash dividends of $80,000. At the end of the year, the market value of Stober's investment is $2.4 million.

a. Stober's $364,000 unrealized gain in the market value of the Lang investment (choose one and explain):

1. is not reflected on either its income statement or balance sheet

2. is reported in its current income

3. is reported on its balance sheet only.

4. is reported on its accumulated other comprehensive income.

Explanation / Answer

a. The unrealised gain is reported on its balance sheet only. i.e., option 3 is correct.

The unrealised gain is reported as 1-increse the investment side of assets and 2- increase the stockeholders equity component-accumulated other comprehensive income

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