On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

Question

Quizplus · Accepted Answer

When an investor achieves significant influence over an investee, it must use the equity method to account for the investment. This means that Dermot must apply the equity method from the date it obtained significant influence, which was January 1, 2013. However, the financial statements for 2012 and 2011 must be restated as if the equity method had been used for those two years. This is because the carrying value of the investment on January 1, 2013, includes the carrying value of the investment on January 1, 2011, and January 1, 2012. Therefore, the financial statements for those years need to be adjusted to reflect the new accounting method. Option C is the correct answer as it reflects this requirement.

On January 1, 2011, Dermot Company Purchased 15% of the Voting