Rock Company acquired 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. The should be used to account for the investment.
A) cost method
B) market method
C) consolidated method
D) equity method

Question

Quizplus · Accepted Answer

The equity method is used when an investor has significant influence over the investee, typically indicated by ownership of 20% to 50% of the voting stock. Rock Company owns 40% of Hudson Company, indicating significant influence, thus the equity method is appropriate.

Rock Company Acquired 40% of the Voting Stock of Hudson