Homework Answers
Answer is Option a.
Under the equity method, the investor adjusts the portion of the investee's income recognized to account for differences between the book values of the investee's assets and liabilities and their fair values. Under FIFO, it is assumed that inventory on hand is sold first and, if the fair value is greater than the carrying value, the difference increases cost of sales, decreasing the investee's income. Likewise, if the fair value of plant assets is greater than the carrying value, the difference will be allocated over the asset's depreciable life, increasing depreciation expense and further reducing the investee's income. The investor will then recognize a proportionate amount of the investee's adjusted income.
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