An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

The correct question is:

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations.

B. The loss would be ignored but shown in the investor's notes to the financial statements.

C. The extraordinary loss should increase equity in investee income.

D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income.

E. The extraordinary loss would reduce the value of the investment.

Answer:

The extraordinary loss would reduce the value of the investment.

Explanation:

An extraordinary loss occurs because of an activity that does not frequently occur and is usually one-off. Outside usual activities of the business.

It is not expected to reoccur, and is reported in the income statement below income.

For example loss of stock of goods to fire outbreak, flood, or earthquake.

The value of investment is negatively impacted by extraordinary loss. It reduces Earnings per Share (EPS).