Palm Inc.owns 12 percent of Tree Co., 18 percent of Pine Inc., and 25 percent of Spruce Inc.Palm intends to classify all three investments as long-term.How should Palm account for each of these investments?

Question

Quizplus · Accepted Answer

The cost method is generally used when an investing company owns less than 20% of the company it has invested in, as it typically does not have significant influence over the company. The equity method is used when the ownership is between 20% and 50%, where the investor has significant influence. Therefore, for Tree Co. (12%) and Pine Inc. (18%), the cost method applies, and for Spruce Inc. (25%), the equity method is appropriate.

Palm IncOwns 12 Percent of Tree Co