CMA Study Group

  • 1.  Equity Method Question

    Posted 05-30-2021 11:38 AM
    Hello - I need help on this question: 
    An investor uses the equity method to account for an investment in common stock. The investor's equity in the earnings of the investee is affected by
    1. Cash Dividends from Investee (YES/NO?)
    2. A change in fair value of the Investee's Common Stock (YES/NO?)
    The answer is NO to both. Can I please get an explanation as to why? Below is my assumption based on my understanding, but I am doubting on it.
    1. Cash Dividends will affect the investor's investment by debiting the investment, thus, decreasing the investment. The investment is an Asset account, so therefore, it does not affect the Investor's Equity, correct?
    2. Change in Fair Value - it does not affect the Investor's Equity because a change in FV of the investment means that an unrealized gain/or loss happens and therefore, it affects the income statement, and then it increases Investment (an Asset) and not equity? 
    Please advise!

    Daly City CA
    United States