Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X0 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X0, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X0 net income was $52 million. What method of accounting will Phillips use to account for this investment?

Question

Quizplus · Accepted Answer

Phillips Corporation will use the Fair Value Method to account for its investment in Martin Corporation because it owns only 10% of Martin's voting stock, which typically does not give it significant influence over Martin. The Fair Value Method is used for investments where the investor does not have significant influence over the investee, generally interpreted as ownership of less than 20% of the voting shares.

Phillips Corporation Purchased 1,000,000 Shares of Martin Corporation's Common Stock