Question

Hawkins company has owned 10 percent of Larker Inc., for the past several years. This ownership did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. How will the investor report change?

a. a cumulative effect of an accounting change is shown in the current income statement
b. a retrospective adjustment is made to restate all prior years presented using the equity method
c. no change is recorded; the equity method is used from the date of the new acquisition
d. Hawkins will report the change as a component of accumulated other comprehensive income

Answer 1

An equity security can be defined as the stocks owned by someone of another company. This will give the stockholder opportunity a power to influence the operational and management decision of the company. Based on the number of shares, the accounting method is decided for the same.

In equity method, the profits earned by the investments of stockholders in other companies are determined by the company. Companies use the equity method to record the investments as soon as they make the investments.

Option A:

Since they had to show the investment in the income statement before as well, option A is not correct.

Option B:

No adjustment entry would be made for the prior years as for the past years, only 10% was owned. So option B is also incorrect.

Option C:

This option is correct because the equity method starts from the time the investment is made.

Option D:

No change will be made at the end of Hawkins. So option D is also incorrect.

So the answer to the question is option C.