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

Question

Quizplus · Accepted Answer

The equity method should be used by Rocky Company to account for the investment, as they own 40% of the voting stock of Boulder Company. Under the equity method, the investment is initially recorded at cost, and then adjusted for the investor's share of the investee's net income or loss and dividends declared. Since the market value of the investment at the end of Year 1 is not relevant under this method, choices A and C can be eliminated. The consolidated method is used when one company owns a controlling interest (more than 50%) in another company, so choice B is not applicable in this situation.

Rocky Company Acquired 40% of the Voting Stock of Boulder