Question

Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015?

I. $3,000,000
II. $3,040,000
III. $3,120,000
Select one:
A. I, II, and III Incorrect
B. I or II only
C. II only
D. II or III only

Answer 1

The acceptable value that Dublin should use in its balance sheet at December 31, 2015, is $3,040,000 or $3,120,000.

Step-by-step explanation:

The acceptable value that Dublin should use in its balance sheet at December 31, 2015, is II. $3,040,000.

The equity method is used to account for investments in which an entity has significant influence over the investee. Under this method, the initial investment is recorded at cost and subsequently adjusted for the investor's share of the investee's earnings or losses. The balance of $3,040,000 in the Investment in Club Company account represents the equity method adjustment for Dublin's share of Club Company's earnings.

However, according to accounting principles, the fair value of an investment can also be used in the balance sheet if it is more readily determinable. In this case, the fair value of the investment in Club Company is $3,120,000. Therefore, Dublin could also use this fair value of $3,120,000 in its balance sheet at December 31, 2015.