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5. The following events necessitate changes in this investment account.
a. Net income earned by Watts would be reflected by an increase in the investment balance whereas a
reported loss is shown as a reduction to that same account.
b. Dividends declared by the investee decrease its book value, thus requiring a corresponding reduction
to be recorded in the investment balance.
c. If, in the initial acquisition price, Smith paid extra amounts because specific investee assets and
liabilities had values differing from their book values, amortization of this portion of the investment
account is subsequently required. As an exception, if the specific asset is land or goodwill, amortization
is not appropriate.
d. Intra-entity gross profits created by sales between the investor and the investee must be deferred until
earned through usage or resale to outside parties. The initial deferral entry made by the investor
reduces the investment balance while the eventual recognition of the gross profit increases this
account.

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