Reference no: EM132816981

Problem 1: Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

A. investor sells the investment.

B. investee declares a dividend.

C. investee pays a dividend.

D. earnings are reported by the investee in its financial statements.

Problem 2: Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

A. Understate, overstate, overstate

B. Overstate, understate, understate

C. Overstate, overstate, overstate

D. Understate, understate, understate