If 10% of the common stock of an investee company is purchased as a long-term investment the appropriate method of accounting for the investment is
A) the cost method.
B) the equity method.
C) the preparation of consolidated financial statements.
D) determined by agreement with whomever owns the remaining 90% of the stock.

Question

Quizplus · Accepted Answer

When an investor purchases a small percentage (usually less than 20%) of the common stock of another company and does not have significant influence over the investee, the cost method is typically used to account for the investment. This method involves recording the investment at cost and recognizing income when dividends are received.

If 10% of the Common Stock of an Investee Company