Luna has recorded its investment in Instate utilizing the equity method of accounting for intercorporate investments. According to FASB, which of the following statements most accurately reflects the impact on an investor’s financial statements by using the equity method?
A) The investing firm will not make any adjustments to its financial statements to reflect its proportionate share of the investee’s net assets, but will reference the investment in the footnotes.
B) Market values can be compared with the carrying amount for analysis purposes, but only market values may be used in the financial statements.
C) The investing firm can include a proportionate share of the investee’s income in its earnings, regardless of whether or not there are actual cash flows (i.e. dividends).
Correct answer C. Explanation - The proportionate share of the investee’s income is included in the parent’s income statement. Changes in the market value of the investee are not reflected in the investing firm’s income statement so long as the decline in value is not considered to be permanent.
Now my question is why option A is wrong? C is correct, I understand. Thank you.