Question

Under the equity method, the Stock Investments account is increased when the Select one: a. investee company reports net income, and when the investee company pays a dividend. b. investee company pays a dividend. c. investee company reports net income. d. stock investment is sold at a loss. e. stock investment is sold at a gain.

Answer 1

c. investee company reports net income.

Step-by-step explanation:

The equity method refers to the technique that is employed to value the investment of a company in another company, or record the profits earned through the investment in an investee company when the investor company holds a significant influence over the investee company.

A 20-50% ownership in a company is usually used as a threshold for a significant influence.

When an investee company reports net income, this will to an increase in the asset value of the investor in the balance sheet. But, the investee company reports a loss or pays dividend, it will decrease the asset value.

Therefore, under the equity method, the Stock Investments account is increased when investee company reports net income.

Answer 2

The answer is C) Investee company reports net income

Step-by-step explanation:

The equity method is an accounting standard used by a company to record the profits that accrue from its investment in another company.

With the equity method of accounting, the investor company reports the revenue earned by the other company on its income statement, in an amount proportional to the percentage of its equity investment in the other company.

The equity accounting method seeks to reflect any subsequent changes in the value of the investee business in this investment account.

For example, if the investee makes a profit, the Stock Investments account is increased in value and the investor reflects its share of the increase in the carrying value shown on its investment account.

Net income of the investee company increases the investor's asset value on its balance sheet, while the investee's loss or dividend payout decreases it.