CFA Practice Question

There are 334 practice questions for this study session.

CFA Practice Question

Apex Corp. purchases an investment in Pinnacle, Inc. at a purchase price of $5 million, representing 40% of the book value of Pinnacle. During the year, Pinnacle reports net income of $600,000 and pay dividends of $200,000. At the end of the year, the market value of Apex's investment is $5.3 million. Apex will report the following income relating to this investment during the year:
A. $240,000
B. $200,000
C. $300,000
Explanation: Equity income is computed as the investee company earnings multiplied by the percentage of the company owned. In this case, equity earnings are $600,000 * 40% = $240,000. Dividends are treated as a return of investment (reduce the investment balance), and not as income. Also, the investment is recorded as adjusted cost, not at market value, and unrealized gains (losses) are neither recognized on the balance sheet nor in the income statement.

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dblueroom The explanation tells all we need to know about Equity method.
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