Question

Under the equity method, which of the following does not cause a decrease in the investment account?

1) Dividends received from the investee
2) Amortization of excess purchase price
3) Impairment of the investee's assets
4) Increase in the investee's net income

Answer 1

The increase in the investee's net income is the event that does not cause a decrease in the investment account under the equity method. Dividends received, amortization of excess purchase price, and impairment of the investee's assets all decrease the investment account value.

Step-by-step explanation:

Under the equity method of accounting, an investor recognizes its share of the profits and losses of the investee company in its own financial statements. The specific question is asking which of the following events does not cause a decrease in the value of the investment account on the investor's balance sheet:

• Dividends received from the investee usually result in a decrease in the investment account because they are considered a return of investment.
• Amortization of excess purchase price, also known as impairment, is a systematic write-down of the investment value over time, which decreases the investment account.
• Impairment of the investee's assets can lead to a decrease in the investment account if the value of the investee decreases.
• An increase in the investee's net income results in an increase in the investment account as the investor recognizes its share of these earnings.

Therefore, the correct answer is that an increase in the investee's net income does not cause a decrease in the investment account. Instead, it would increase the carrying value of the investment.