For accounting purposes, the method used to account for investments in common stock is determined by
A) the amount paid for the stock by the investor
B) whether the acquisition of the stock by the investor was "friendly" or "hostile"
C) the extent of an investor's influence over the operating and financial affairs of the investee
D) whether the stock has paid dividends in past years

Question

Quizplus · Accepted Answer

The method used to account for investments in common stock is determined by the extent of an investor's influence over the operating and financial affairs of the investee. This is because if the investor has significant control over the investee, the investment will be accounted for using the equity method, while if the investor has little to no control, the investment will be accounted for using the fair value method. The amount paid for the stock, whether the acquisition was friendly or hostile, and whether the stock has paid dividends in past years are not relevant factors in determining the accounting method used for investments in common stock.

For Accounting Purposes, the Method Used to Account for Investments