REFERENCE: Ref 01_01 On January 3,2008,Austin Corp.purchased 25% of the Voting Common Stock

REFERENCE: Ref 01_01
On January 3,2008,Austin Corp.purchased 25% of the voting common stock of Gainsville Co. ,paying $2,500,000.Austin decided to use the equity method to account for this investment.At the time of the investment,Gainsville's total stockholders' equity was $8,000,000.Austin gathered the following information about Gainsville's assets and liabilities:
SHAPE \* MERGEFORMAT
For all other assets and liabilities,book value and fair value were equal.Any excess of cost over fair value was attributed to goodwill,which has not been impaired.
-Club Co.appropriately uses the equity method to account for its investment in Chip Corp.As of the end of 2008,Chip's common stock had suffered a significant decline in fair value,which is expected to be recovered over the next several months.How should Club account for the decline in value?

A) Club should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
D) Club should not record its share of Chip's 2008 earnings until the decline in the fair value of the stock has been recovered.
E) Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

Correct Answer:

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