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At the end of the period, an equity-method investment (25% ownership) has a carrying amount of $70,000 while the shares' fair value differs. What fair value adjustment is recorded?
AAdjust the investment up to fair value with an unrealised gain
BAdjust the investment down to fair value with an unrealised loss
CNo adjustment to fair value is made
DRecord a realised gain equal to the fair value change
Answer & Solution
Correct answer: C. No adjustment to fair value is made
1. The equity method applies when ownership is 20% or more.
2. For such investments there is no adjustment to fair value at period end.
3. The carrying amount stays at $70,000, driven only by purchase, dividends and share of income.
4. Fair value adjustments (A, B) belong to the less-than-20% fair value method; no realised gain arises without a sale.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.2 "Adjust to Fair Value", p.186_
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