When a public company holds between 20% and 50% of the outstanding common shares of an investee, which of the following statements applies?
A) The investor should always use the equity method to account for its investment.
B) The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
C) The investor must use the cost method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D) The investor should always use the cost method to account for its investment.

Question

Quizplus · Accepted Answer

When a public company holds between 20% and 50% of the outstanding common shares of an investee, the investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. If the investor cannot exercise significant influence, then it must use the cost method. Therefore, statement A and D are incorrect, and statement C is partially correct but not the best choice. The best choice is B because it fully captures the condition and exception for this scenario.

When a Public Company Holds Between 20% and 50% of the Outstanding