Question

Town Company appropriately uses the equity method to account for its investment in Country Corporation. As of the end of 2024, Country's common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Town account for the decline in value?

a. Recognize the loss in fair value immediately on the income statement.
b. Adjust the investment account to reflect the decline and recognize the loss on the income statement.
c. Ignore the decline in fair value until it is fully recovered.
d. Recognize the decline in fair value in other comprehensive income.

Answer 1

Town Company should adjust the investment account to reflect the decline and recognize the loss on the income statement.

Step-by-step explanation:

Town Company should em>not recognize the decline in fair value of its investment in Country Corporation immediately on the income statement. Instead, they should adjust the investment account to reflect the decline and recognize the loss on the income statement. This is because Town Company uses the equity method to account for its investment in Country Corporation. Under the equity method, changes in the fair value of the investment are not recognized in the income statement but are reflected in the investment account.