For accounting purposes, the method used to account for investments in common stock is determined by
A) the amount paid for the stock by the investor.
B) the extent of an investor's influence over the operating and financial affairs of the investee.
C) whether the stock has paid dividends in past years.
D) whether the acquisition of the stock by the investor was "friendly" or "hostile."

Question

Quizplus · Accepted Answer

The method used to account for investments in common stock is determined by the extent of an investor's influence over the operating and financial affairs of the investee. This is known as the equity method, which is used when an investor has significant influence over the investee (20-50% ownership). If the investor has less than 20% ownership, the cost method is typically used. The amount paid for the stock, whether the stock has paid dividends in past years, and the nature of the acquisition (friendly or hostile) are not relevant factors in determining the accounting method used for investments in common stock.

For Accounting Purposes, the Method Used to Account for Investments