Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classiﬁcations should be used by Idaho Company in accounting for the investment?
A) Trading securities.
B) Held-to-maturity.
C) Available-for-sale.
D) Consolidation.

Question

Quizplus · Accepted Answer

Since Idaho Company purchased nonvoting preferred stock, it does not have significant influence over Potato Corporation. Therefore, the investment cannot be accounted for using the equity method or consolidation. Preferred stock cannot be classified as held-to-maturity because this category is reserved for debt securities that the company has the positive intent and ability to hold to maturity. Trading securities are meant for short-term profit through active buying and selling, which does not seem to be the intent described. Available-for-sale is the appropriate classification for such investments that do not fit the other categories and are not intended for active trading.

Idaho Company Purchased 30% of the Outstanding Preferred Stock (Nonvoting)