Question

The equity method is used when an investor can't control, but can exercise significant influence over the operating and financial policies of the investee. We presume, in the absence of evidence to the contrary, that this is so if:
A. The investor classifies the investment as available-for-sale.
B. The investor classifies the investment as held-to-maturity.
C. The investor owns between 51% or more of the investee's voting shares.
D. The investor owns between 20% and 50% of the investee's voting shares.

Answer 1

Answer:

D. The investor owns between 20% and 50% of the investee's voting shares.

Explanation:

When an investor owns shares of a company providing more than 20% voting rights or above it can, use equity method.

Under such instance the investor can exercise strong influence on the investee but cannot control the activities whether operating or financial in nature.

If the investor holds more than 50% shareholding in investee's common equity, then the investor can control the transactions of the investee, though it can use equity method.

Therefore, correct option is:

D. The investor owns between 20% and 50% of the investee's voting shares.