If the equity method is used to account for an investment in common shares
A)it is presumed that the investor has no significant influence on the investee.
B)net income of the investee is ignored by the investor.
C)net income of the investee is recorded as realized gains, but dividends received are credited to the investment account.
D)the investment account may be at times greater than the acquisition cost.

Question

Quizplus · Accepted Answer

The equity method of accounting for investments in common shares is used when the investor has significant influence over the investee, typically indicated by owning 20% to 50% of the voting stock. Under this method, the investor recognizes its share of the investee's net income or loss, which increases or decreases the investment account. Dividends received from the investee decrease the investment account. Therefore, it's possible for the investment account to exceed the acquisition cost due to the accumulation of the investor's share of net income over time.

If the Equity Method Is Used to Account for an Investment