If one company owns more than 20% of the shares of another company and the shares are being held as a long-term investment,which method would normally be used to account for this investment?
A) Equity.
B) Fair value.
C) Historical cost.
D) Straight-line.
E) EffectivE.

Question

Quizplus · Accepted Answer

When a company owns between 20% and 50% of the shares of another company, it is generally considered to have significant influence over the second company. In such cases, the equity method is used to account for the investment. The equity method recognizes the investment as an asset on the balance sheet and allocates a proportionate share of the investee's net income to the investor's income statement. This method more accurately reflects the economic reality of the investment over time, as the investor's fortunes are tied to those of the investee.

If One Company Owns More Than 20% of the Shares