Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.The _____ method should be used to account for the investment.
A)market
B)equity
C)consolidated
D)cost

Question

Quizplus · Accepted Answer

The equity method is appropriate for investments where the investor has significant influence over the investee, typically indicated by ownership of 20% to 50% of the voting stock. Rock Company's 40% ownership in Hudson Company suggests significant influence, making the equity method the correct accounting approach.

Rock Company Acquired 40% of the Voting Stock of Hudson