McCoy Corporation purchased 7,400 shares of Chudzick Company's common stock. The purchase price was $362,600, which is equal to 50% of Chudzick Company's retained earnings balance. Chudzick Company's 46,000 shares of common stock are actively traded, and each share has a par value of $10. McCoy Corporation should account for this long-term investment using the

Question

Quizplus · Accepted Answer

BThe 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. However, the fair value method is applied when the shares are actively traded, and the investment does not grant significant influence over the company. In this case, McCoy Corporation owns 7,400 out of 46,000 shares of Chudzick Company, which is approximately 16.09%, suggesting significant influence might not be present. However, the question does not provide explicit information about the level of influence McCoy has, making both the fair value method and the equity method potentially correct depending on additional details about the relationship between McCoy and Chudzick. The consolidation method is used when the investor controls the investee, typically more than 50% ownership, which is not the case here. The amortized cost method is generally used for debt investments rather than equity securities.

McCoy Corporation Purchased 7,400 Shares of Chudzick Company's Common Stock