After acquiring a 2% stake in Magnet Corporation using the Cost Method, how will Dynamo Company account for the earnings reported by Magnet Corporation?

When Dynamo Company acquires a 2% stake in Magnet Corporation using the Cost Method, the accounting treatment for earnings reported by Magnet Corporation is important to understand in the context of equity investments. The Cost Method is typically applied for investments where the investor has little or no influence over the investee, generally characterized by ownership of less than 20%.

Under this method, the initial investment is recorded at its purchase cost, and subsequent income in the form of dividends is recognized when received. However, any earnings reported by Magnet Corporation would not impact the carrying value of the investment on Dynamo's balance sheet, nor would they be recognized in revenue. This is because the Cost Method does not allow for the recognition of the investee's earnings unless actual dividends are distributed. Thus, since Dynamo has only a minimal stake in Magnet Corporation, it will not recognize any income or increase the value of its investment based on the reported earnings of Magnet Corporation, aligning with the approach of using the Cost Method.

This understanding clarifies why the choice stating that no income will be recognized or investment value increased is the correct one. The other options suggest alternative treatments that do not apply within the framework of the Cost Method for a minor ownership stake.