A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?

Question

Quizplus · Accepted Answer

When a company sells shares and no longer has significant control, it must switch from the equity method to the fair value or cost method for accounting. This change is considered a prospective change in accounting principle, meaning it is applied to future periods but does not adjust the financial statements of previous periods. Therefore, choice B is correct. A cumulative effect change in accounting principle would be required if the company had been using an incorrect accounting method in previous periods, which is not the case here. Choice C is also incorrect because a retrospective change would require adjusting the financial statements of previous periods, which is not necessary in this scenario. Choices D and E are not necessarily true and do not relate to the accounting treatment for the change.

A Company Has Been Using the Equity Method to Account