If an investor sells a portion of an equity investment and it reduces its interest below 20 percent the equity method of accounting is no longer appropriate.

Question

Quizplus · Accepted Answer

According to the equity method of accounting, if an investor owns between 20 and 50 percent of the outstanding voting stock of the investee, the investor must account for its investment using the equity method. If the investor sells enough shares to reduce its interest below 20 percent, the equity method of accounting is no longer appropriate and the investor must switch to another method, such as the cost method or the fair value method.

If an Investor Sells a Portion of an Equity Investment