The cost method of accounting for long-term investments in stock should be employed when the
A) investor owns more than 50% of the investee's stock.
B) investor has significant influence on the investee and the stock held by the investor are marketable equity securities.
C) market value of the shares held is greater than their historical cost.
D) investor's influence on the investee is insignificant.

Question

Quizplus · Accepted Answer

The cost method of accounting should be used when the investor's influence on the investee is insignificant. If the investor owns more than 50% of the investee's stock, the equity method should be used instead. If the investor has significant influence on the investee and holds marketable equity securities, the fair value method should be used. And if the market value of the shares held is greater than their historical cost, the unrealized gain or loss should be recorded in the investor's equity section.

The Cost Method of Accounting for Long-Term Investments in Stock