When an investor owns between 20% and 50% of the common stock of a corporation it is generally presumed that the investor
A) has insignificant influence on the investee and that the cost method should be used to account for the investment.
B) should apply the cost method in accounting for the investment.
C) will prepare consolidated financial statements.
D) has significant influence on the investee and that the equity method should be used to account for the investment.

Question

Quizplus · Accepted Answer

According to accounting standards, owning between 20% and 50% of the common stock of a corporation is generally considered to give the investor "significant influence" over the investee. As a result, the equity method of accounting should be used to account for the investment. This involves recognizing the investor's share of the investee's income on the investor's income statement, as well as reflecting changes in the investee's equity on the investor's balance sheet. Consolidated financial statements would only be prepared if the investor had control over the investee (i.e. owned more than 50% of the common stock). Using the cost method of accounting (option A and B) would only be appropriate if the investor had little influence over the investee.

When an Investor Owns Between 20% and 50% of the Common