For accounting purposes the method used to account for long-term 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 on 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 extent of an investor's influence on the operating and financial affairs of the investee determines the method used to account for long-term investments in common stock. This influence is referred to as significant influence, and if it exists, the investor must use the equity method of accounting to report its investment in the investee's financial statements. If the investor does not have significant influence over the investee, it must use the fair value or cost method of accounting, depending on the circumstances. The amount paid for the stock, whether it paid dividends in the past years, and whether the acquisition was friendly or hostile do not affect the method of accounting for long-term investments in common stock.

For Accounting Purposes the Method Used to Account for Long-Term