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

Question

Quizplus · Accepted Answer

The best choice is the equity method. The equity method is used by an investor when it has significant influence over the investee (between 20% to 50% ownership in voting stock). Under the equity method, the investor records its initial investment at cost and subsequently adjusts the investment account for its share of the investee's net income or loss and dividends declared. As Randy Company acquired 40% of the voting stock of Biel Company, it has significant influence over Biel Company and, therefore, should use the equity method.

Randy Company Acquired 40% of the Voting Stock of Biel