If a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment, which method would the investor normally use to account for this investment?

Question

Quizplus · Accepted Answer

When a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment, the investor normally uses the equity method to account for this investment. Under the equity method, the investor records its share of the investee's net income or loss on its own income statement, and the investment is initially recorded at cost. Dividends received reduce the investment balance, and any excess of dividends received over the investor's share of the investee's earnings is recorded as a gain.

If a Company Owns More Than 20% of the Stock