Question

If 25% of the common stock of an investee company is purchased long term investment the appropriate method of accounting for the investment is:_______
a. the cost method.
b. the equity method.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the stock.

Answer 1

Answer:

b. the equity method.

Explanation:

The equity method is used when the investor company will own approximately 20% to 50% of the common stock of the investee company. This method is used because the investor company will have significant influence over the actions taken by the investee company. The investee company will generally be considered an affiliate company, but not a subsidiary.