A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using
A) the cost method.
B) the equity method.
C) the significant method.
D) consolidated financial statements.

Question

Quizplus · Accepted Answer

When a company acquires less than 20% ownership interest in another company, it is not deemed to have significant influence over the investee's operations. Therefore, in accordance with GAAP, the cost method should be used to account for the stock investment. Under this method, the initial investment is recorded as an asset at cost and subsequent dividends received are recorded as income. There is no adjustment to the investment account for changes in the fair value of the investee's stock.

A Company That Acquires Less Than 20% Ownership Interest in Another