Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock, which constitutes 10% of Martin's voting stock on June 30, 2016 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2016, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and Martin reported 2016 net income of $52 million. What method of accounting will Phillips use to account for this investment?

Question

Quizplus · Accepted Answer

Phillips Corporation will use the fair value method because it owns less than 20% of Martin Corporation's voting stock, indicating it does not have significant influence over Martin.

Phillips Corporation Purchased 1,000,000 Shares of Martin Corporation's Common Stock