Question

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2018, Chip’s common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Club account for the decline in value?

Answer 1

The answer is: Club Co. shouldn't do anything since the price decline is only temporary.

Step-by-step explanation:

The equity method refers to treating investments in other companies (e.g. Chip Corp.) as assets in the balance sheet.

Since the decrease in the price of Chip's common stock is only temporary, Club Co. should not record any modification in its balance sheet. If the decrease was expected to be permanent, then they should record it by lowering its value (it's an asset) and recording a loss (decrease in equity).