CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Merck's 2011 annual report contains the following note:

5. Affiliates Accounted for Using the Equity Method

Investments in affiliates accounted for using the equity method are included in other assets and were $2.0 billion on December 31, 2011. Dividends and distribution received from these affiliates were $572.2 million in 2011, $475.5 million in 2010 and $412.2 million in 2009.

Which of the following statements is true?
A. Merck reported $572.2 million of investment income during 2011.
B. The $2 billion refers to the market value of the investee companies.
C. The dividends received were accounted for as a reduction of the investment balance on Merck's balance sheet.
Explanation: Under the equity method of accounting, dividends received are accounted for as a return of investment and, as a result, reduce the investment balance. Dividends are not recorded as income under the equity method. Also, unrealized gains (losses) are not recorded on either the balance sheet or the income statement. The investments are reported at adjusted cost, not at market value.

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