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Becker Question CPA-06691

An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

a. An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value.

b. The investee’s decision to reduce cash dividends declared per share of its common stock.

c. An error in recording the unrealized gain from an increase in the fair value of available-for sale

securities in the income account for trading securities.

d. A substantial fluctuation in the price of the investee’s common stock on a national stock exchange.

Explanation

Choice “a” is correct. Under equity method accounting, the amortization of the excess of the investor’s cost over the investment’s underlying book value reduces the investor’s income from the equity method investment. If amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment.

QUESTION:

What do they mean by lower return on investment? I just took FAR but for some reason it’s not coming to me.

done