medium · Financial Accounting assets
A firm using the equity method paid a premium over book value for its 25% interest. The excess was attributed to inventory using the FIFO method. In the first year following the acquisition, the investee sold all its beginning inventory.
How should the investor account for this specific basis difference in Year 1?
- As a one-time reduction to 'Equity in Earnings' for the full 25% share of the inventory's fair value increment.
- As a permanent addition to the investment's carrying value that is only tested for impairment thereafter.
- Amortized over the weighted average remaining useful life of the investee's total identifiable asset base.
- Ignored entirely in Year 1 and recognized only once the investor eventually sells its entire equity ownership stake.
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