Asked by Jaylin Johnson on Jul 12, 2024
Verified
Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the
A) equity method
B) market method
C) cost or market method
D) fair value method
Equity Method
An accounting technique used for recording investments in which the investor has significant influence over the investee but does not have full control.
Significant Influence
A situation in which an investor has the power to participate in the financial and operating policy decisions of an investee, but not control over them.
Operating And Financial Policies
Operating and financial policies are the strategies and guidelines that a company follows in its daily activities and financial decision-making processes.
- Comprehend the application of the equity accounting method for investments.
Verified Answer
JN
Jacee NorizsanJul 17, 2024
Final Answer :
A
Explanation :
According to the description, Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. This implies that Armando has between 20% and 50% ownership in Tito, which requires the use of the equity method of accounting under generally accepted accounting principles (GAAP). This method allows the investor to report its share of the investee's net income or loss on its income statement and adjust its investment account for its share of the investee's dividends or retained earnings. Thus, the equity method is the best choice for accounting for this investment.
Learning Objectives
- Comprehend the application of the equity accounting method for investments.