medium · Financial Accounting accounting-cycle-financial-statements
Apex Ltd owns 35% of Base Co. and applies the equity method. In 20X6, Base Co. reports a net income of $100,000 but has a beginning deficit in Retained Earnings of $500,000. Apex's investment account has a balance of $10,000.
If Base Co. then reports a net loss of $40,000, what is the impact on Apex's investment account?
- The account balance remains at $10,000 because the investee has a negative Retained Earnings.
- The investment account is reduced to 0, and the remaining $4,000 loss is unrecognized.
- The investment account is reduced by the full 14,000 share of the loss.
- The loss is recorded as a liability on Apex's balance sheet.
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