If the subsidiary subsequently reports gross income, the insurer resumes applying the equity method only after its share of that gross income equals the share of net losses not recognized during the…

Question

Options

• ATrue
• BFalse

• A
  20% (10)
• B
  80% (39)

Explanation

B is correct because the equity method resumes based on the investor's share of net income - not gross income - equaling the previously unrecognized net losses. The statement substitutes "gross income" for the correct term, making it false; gross income ignores expenses and would cause the equity method to resume prematurely, overstating the investment's carrying value.

Why A (True) is wrong: Accepting the statement as written would mean using a pre-expense figure to "recover" suspended losses, which violates the matching principle and would misstate earnings - the rule specifically requires net income to ensure expenses are accounted for before recognizing any catch-up.

Memory tip: Think of the suspension period like a tab at a bar - you can't start a fresh tab (resume equity method) until your full unpaid balance (unrecognized net losses) is covered by real earnings, and real earnings are always net, not gross.

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