Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock,which constitutes 10% of Martin's voting stock on June 30,2019 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2019,Martin paid a $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and Martin reported 2019 net income of $52 million.
- What method of accounting will Phillips use to account for this investment?

Question

Quizplus · Accepted Answer

Phillips Corporation will use the Fair Value Method to account for its investment in Martin Corporation. Since Phillips owns only 10% of Martin's voting stock, it does not have significant influence over Martin, which typically requires ownership of 20% or more. Therefore, the Equity Method is not applicable, and because Phillips does not control Martin, Consolidation is also not appropriate. The Amortized Cost Method is generally used for debt securities, not equity investments. The Fair Value Method is used for investments in stocks that do not result in significant influence or control, where the investment is recorded at fair value with changes recognized in earnings.

Phillips Corporation Purchased 1,000,000 Shares of Martin Corporation's Common Stock,which