CFA Practice Question

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CFA Practice Question

Under the equity method, if an investee company generates net income, the investor company:
A. Records its proportionate share of the net income as investment income.
B. Records its proportionate share of the net income as an increase in its investment account.
C. Records its proportionate share of the net income as an unrealized gain.

User Contributed Comments 9

User Comment
rainbowsoda why not A? Investment account is asset account while income is on PL (Profit and Loss).
PedroEdmundo So there will be nothing posted on the Income statement? the % of NI will be posted on the IS.While, the same amount is added to the investment account.
ThePessimist In short, it appears on the income statement, but as equity income rather than investment income and it is a single item. B is more correct than A.
sbakar The answer doesn't hold up if the dividend payout is 100%
dblueroom sbakar, from an investor perspective, it doesn't matter net income is 100% distributed as dividend. you still recognize your proportional share of investee's net income as income, and your investment account is reduced by your share of dividends received. So what's up with A? so it is not investment income but just income?
Sibaya I also guess its really all about the kind of income. I guess it would be recorded as equity income and not as investment income. I guess... ;-)
richmondo Hmm - i misinterpreted this too - the income is shown under equity income
broadex Investment income is income from investments with less than 20%. Otherwise this should be treated as equity income.
sunday128 Still don't get why this is equity income rather than investment income. B is more correct than A IF it says that it records proportionate share of net income less dividend paid in its investment account. Recording proportionate share of net income as investment income is more accurate than B imo.
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