If the cost method is used to account for a long-term investment in common stock
A) it is presumed that the investor has significant influence on the investee.
B) the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
C) net income of the investee is not considered earned by the investor until dividends are declared by the investee.
D) the Investment account may be at times greater than the acquisition cost.

Question

Quizplus · Accepted Answer

The cost method of accounting for long-term investments in common stock is used when the investor does not have significant influence over the investee, typically indicated by ownership of less than 20% of the voting stock. Under this method, the investment is initially recorded at cost, and the investor recognizes income only when dividends are received from the investee, not when the investee earns net income. This approach reflects the idea that the investor does not have a claim on the investee's earnings until dividends are actually declared.

If the Cost Method Is Used to Account for a Long-Term