Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classifications should be used by Idaho Company in accounting for the investment?

Question

Quizplus · Accepted Answer

Since the investment is being held as a long-term investment rather than for trading purposes, the trading securities classification (choice C) is inappropriate. The held-to-maturity classification (choice B) only applies to debt securities, not preferred stock. Consolidation (choice A) is used when the investor has control over the investee. Since the investment is only 30% of the outstanding preferred stock, Idaho Company does not have control. Therefore, the best classification to use in this situation is available-for-sale (choice D).

Idaho Company Purchased 30% of the Outstanding Preferred Stock (Nonvoting)