Question

1. Grant Corporation has owned 40% of the voting stock of Halliday Company for many years, originally purchased at book value and reported using the equity method. At the beginning of the current year, the carrying value of the investment is $2,000,000. Halliday reports a loss of $6,000,000 for the year, and the loss is considered other than temporary.
   
   What amount should Grant report as equity in the net loss of Halliday for the current year?

   	A.	$6,000,000
   	B.	$2,000,000
   	C.	$2,400,000
   	D.	none

Answer 1

Grant report as equity in the net loss of Halliday for the current year

C. $2,400,000

Explanation (Accounting Process):-

The equity method is used to value a company's investment in another company when it holds significant influence over the company it is investing in.

The threshold for "significant influence" is commonly a 20-50% ownership.

Under the equity method, the investment is initially recorded at historical cost and adjustments are made to the value based on the investor's percentage ownership in net income, loss, and dividend payouts.

Net income of the investee company increases the investor's asset value on its balance sheet, while the investee's loss or dividend payout decreases it.

The investor also records its percentage of the investee's net income or loss on its income statement.

Calculation:-

So, loss of Halliday= $6,000,000

Grant Corp ownership:- 40%

So, equity in the net loss of Halliday reported by Grant = $6,000,000 * 40% = $2,400,000