- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 11. Intercorporate Investments
- Subject 3. Investments in Associates
CFA Practice Question
If Investor Company acquires a 40% interest in Investee Company at book value, which of the following statements is true?
A. Investor Company will report the investment as an asset in the amount of $1,200.
B. Investor Company will report the investment account as an asset in the amount of $2,000.
C. Investor Company will report its investment at fair market value on the balance sheet date.
Explanation: The Investor Company reports the investment owned on its balance sheet under the equity method, initially its purchase price ($1,200 of investee company stockholders' equity of $3,000). The Investee Company assets and liabilities are not reported on the investor's balance. During the consolidation process, the investment account is eliminated and the assets and liabilities to which it relates are substituted. Under the equity method, investments are recorded at adjusted cost, not at market value.
User Contributed Comments 1
| User | Comment |
|---|---|
| dblueroom | .4*(total assets-total liability) |