California Company has 40,000 shares of its common stock outstanding.Utah Company owns 15,000 shares of California Company's stock.Which of the following methods should Utah Company use to account for its investment in California Company?
A) market-value
B) equity
C) consolidated
D) available-for-sale

Question

Quizplus · Accepted Answer

Utah Company should use the equity method to account for its investment in California Company. The equity method is used when the investor has significant influence over the investee, but not control (which would require consolidating the financial statements). Utah Company owns 15,000 out of 40,000 shares, which represents 37.5% ownership and is substantial enough to give Utah Company significant influence. Therefore, Utah Company should use the equity method to record its share of California Company's income or losses on its own financial statements.

California Company Has 40,000 Shares of Its Common Stock Outstanding