London Inc. has a 25% equity interest in Brighton Co., which is accounted for in London Inc.'s consolidated financial statements as an equity method investment at 1 million. London Inc. does not have any legal or constructive obligations and has not made any payments on behalf of Brighton Co. In 20X2, Brighton Co. had a loss of 5 million in the year. How should London Inc. account for its investment in Brighton Co. in its consolidated financial statements for 20X2?
A. London Inc. should stop applying the equity method of accounting and not adjust its investment in Brighton Co.
B. London Inc. should reduce its investment in Brighton Co. to zero and recognize a loan to Brighton Co. of 4 million.
C. London Inc. should reduce its investment in Brighton Co. to zero and recognize a loan to Brighton Co. of 250,000.
D. London Inc. should recognize its share of losses of Brighton Co., reducing its investment to zero.
D. London Inc. should recognize its share of losses of Brighton Co., reducing its investment to zero.
According to the equity method of accounting as per the relevant accounting standards, London Inc. should recognize its proportionate share of Brighton Co.'s losses in its consolidated financial statements for 20X2. As a result, London Inc.'s investment in Brighton Co. would be reduced to zero due to the 25% equity interest it holds.
