If one company owns more than 20% of the shares of another company and the shares are being held as a long-term investment,which method would normally be used to account for this investment?
A)Equity
B)Fair value
C)Historical cost
D)Straight-line
E)Effective

Question

Quizplus · Accepted Answer

When a company owns more than 20% of the shares of another company and intends to hold them as a long-term investment, the equity method is usually used to account for the investment. Under the equity method, the investment is recorded at cost initially and adjusted for the investor's share of the investee's profits or losses. This method is used when significant influence can be exerted over the investee's operations, but not control. The fair value method is used when the investment is not intended to be held for a long-term, while historical cost and straight-line methods are not applicable to investments in shares. The effective interest method is used for debt investments, not equity investments.

If One Company Owns More Than 20% of the Shares