A corporation uses the equity method to account for its 40% ownership of another company. The investee earned $20,000 and paid $5,000 in dividends. The investor made the following entries:
Investment in affiliate $8,000 (Debit)
Equity in earnings of affiliate $8,000 (Credit)
Cash $2,000 (Debit)
Dividend revenue $2,000 (Credit)
What effect will these entries have on the investor's statement of financial position?
A) Investment in affiliate overstated, retained earnings understated.
B) Financial position will be fairly stated.
C) Investment in affiliate overstated, retained earnings overstated.
D) Investment in affiliate understated, retained earnings understated.