BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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between 20% and 50% of the investee’s common stock.
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20% or more of the investee’s common stock.
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more than 50% of the investee’s common stock.
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less than 20% of the investee’s common stock.
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Detailed explanation-1: -The equity method is the standard technique used when one company, the investor, has a significant influence over another company, the investee. When a company holds approximately 20% to 50% of a company’s stock, it is considered to have significant influence.
Detailed explanation-2: -The equity method of accounting should generally be used when an investment results in a 20% to 50% stake in another company, unless it can be clearly shown that the investment doesn’t result in a significant amount of influence or control.
Detailed explanation-3: -The equity method of accounting for long-term investments in stock should be used when the investor has significant influence over an investee and owns: between 20% and 50% of the investee’s common stock.
Detailed explanation-4: -When using the equity method, an investor recognizes only its share of the profits and losses of the investee, meaning it records a proportion of the profits based on the percentage of ownership interest. These profits and losses are also reflected in the financial accounts of the investee.
Detailed explanation-5: -The equity method is a type of accounting used for intercorporate investments. It is used when the investor holds significant influence over the investee but does not exercise full control over it, as in the relationship between a parent company and its subsidiary.