XYZ Corporation acquired a 30% equity stake in ABC Inc. for $1,000,000. ABC has reported the following financial information for the year: Net Income: $800,000 Dividends Paid: $200,000 Other Comprehensive Income: $100,000 Using the equity method, how should XYZ Corporation recognize its investment in ABC Inc. after one year?

Exam

CFA Level 2

Section

Difficulty

Financial Reporting and Analysis

Equity Method Accounting Challenge

Very Hard Intercorporate Investments Equity Method

XYZ Corporation acquired a 30% equity stake in ABC Inc. for $1,000,000. ABC has reported the following financial information for the year:

Using the equity method, how should XYZ Corporation recognize its investment in ABC Inc. after one year?

XYZ Corporation should recognize $240,000 in the income statement and $1,060,000 as the investment's carrying amount.

XYZ Corporation should recognize $240,000 in the income statement and $1,100,000 as the investment's carrying amount.

XYZ Corporation should recognize $220,000 in the income statement and $1,040,000 as the investment's carrying amount.

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