Asked by Regan Waite on Jul 03, 2024
Verified
When is the equity method not used to account for a long-term investment in common stock?
A) When the investment is 30% of the voting stock and significant influence can be achieved.
B) When the investment is 18% and significant influence can be achieved.
C) When the investment is greater than 50% of the voting stock and control is achieved.
D) When the investment is 40% of the voting stock and significant influence can be achieved.
Equity Method
An accounting technique used to record investments in other companies, recognizing the investor’s share of investee profits and losses.
Long-Term Investment
Investments held for an extended period, typically exceeding one year, with the intention of generating higher returns.
- Understand and differentiate between various methods of accounting for long-term investments.
Verified Answer
SG
Shatima GodleyJul 07, 2024
Final Answer :
C
Explanation :
The equity method is not used when the investor has control over the investee, which is achieved when the investor owns more than 50% of the voting stock. In this case, consolidation accounting would be used instead of the equity method. Therefore, choice C is the correct answer. Choice A and D are incorrect because they both mention significant influence, which is the criteria for using the equity method. Choice B is incorrect because it is below the threshold for using the equity method but does not consider control.
Learning Objectives
- Understand and differentiate between various methods of accounting for long-term investments.