In its financial statements, Pare, Inc. accounts for its 15% ownership of Sabe Co. as an available-for-sale security. At December 31, Year 1, Pare has a receivable from Sabe. How should the receivable be reported in Pare's December 31, Year 1, balance sheet?
a. The total receivable should be included as part of the investment in Sabe, without separate disclosure.
b. The total receivable should be offset against Sabe's payable to Pare, without separate disclosure.
c. The total receivable should be reported separately.
d. Eighty-five percent of the receivable should be reported separately, with the balance offset against Sabe's payable to Pare.
Explanation
Choice "c" is correct; the total receivable should be reported separately.
Rule: When a company owns less than 50% of the common stock of an investee corporation, the investment account can be reported under the cost or equity method, depending on whether significant influence is exercised. Receivables and payables to the investee are reported separately on the balance sheet.
Choice "a" is incorrect. The receivable is not part of the investment.
Choice "d" is incorrect. 100% must be disclosed and there can be no elimination.
Choice "b" is incorrect. Receivables and payables must be presented separately with separate disclosure made in the footnotes.
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