Question

Which of the following is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method?

Multiple Choice
A. No journal entry need be made to recognize the investor's portion of the investee's net income.
B. Unrealized holding gains and losses on that investment are recognized in net income.
C. No journal entry need be made to recognize the investor's portion of dividends paid by the investee.
D. All of these answer choices are true.

Answer 1

The false statement regarding the election of the fair value option for an investment normally accounted for under the equity method is that no journal entry is needed for the investor's portion of dividends paid by the investee.

Step-by-step explanation:

The statement that is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method is: No journal entry need be made to recognize the investor's portion of dividends paid by the investee. When the fair value option is elected, unrealized holding gains and losses on that investment are indeed recognized in net income. However, when dividends are paid by the investee, they are still recognized by the investor as dividend revenue or a reduction in the carrying amount of the investment, thus requiring a journal entry. The recognition of dividends is not eliminated by the election of the fair value option.