On January 2,2014,Palmer Corp.paid $500,000 cash to acquire 400,000 shares of stock in Prescott Corp.These shares represent 40% of Prescott's total outstanding stock.How would Palmer record this transaction using the equity method?

Question

Quizplus · Accepted Answer

The equity method is used when an investor holds significant influence over but does not control another company. In this scenario, Palmer Corp. has acquired 40% of Prescott Corp.'s outstanding stock, giving them significant influence. To record this transaction using the equity method, Palmer Corp. would debit Long-Term Investments-Prescott for $500,000 (representing the cost of the 400,000 shares) and credit Cash for $500,000.