Idaho Company purchased, as a long-term investment, 30% of the outstanding nonvoting preferred stock of Potato Corporation. 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 is purchasing preferred stock as a long-term investment, and they do not hold the controlling interest in Potato Corporation, it is appropriate to account for this investment as available-for-sale. This is because the investment is not meant to be sold in the short-term and the company has no significant influence over the corporation. Trading securities are investments that are intended to be sold in the near future, held-to-maturity investments are debt securities that are intended to be held until maturity, and consolidation is only applied if Idaho Company holds a controlling interest in Potato Corporation.

Idaho Company Purchased, as a Long-Term Investment, 30% of the Outstanding