The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment
A) is composed of common stock and it is the investor's intent to vote the common stock.
B) ensures a source of supply of raw materials for the investor.
C) enables the investor to exercise significant influence over the investee.
D) is obtained by an exchange of stock for stock.

Question

Quizplus · Accepted Answer

The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment enables the investor to exercise significant influence over the investee. This is typically when the investor owns between 20% and 50% of the investee's voting stock. In this case, the investor is able to participate in the decisions made by the investee and is therefore required to account for its investment under the equity method. Choices A, B, and D are not relevant criteria for determining when the equity method should be used.

The Equity Method of Accounting for an Investment in the Common