On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, 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 significant influence is achieved, the equity method must be used to account for the investment. Therefore, Dermot must restate its financial statements for 2010 and 2009 as if the equity method had been used for those years. This is known as retrospective application or restatement. Choice A is incorrect because the equity method must be applied retrospectively, not just for the current year. Choice B is incorrect because consolidated financial statements are only necessary if Dermot has control over Horne (which is not indicated in the question). Choice D is incorrect because a prior period adjustment is not sufficient when significant influence has been achieved. Finally, Choice E is incorrect because both 2010 and 2009 financial statements must be restated.

On January 1, 2009, Dermot Company Purchased 15% of the Voting