Cannalli Landscape Architecture has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Cannalli's ﬁnancial statements?
A) 3,000 shares of the 10,000 outstanding preferred shares of Fallow Co
B) 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co
C) 5,000 shares of the 60,000 outstanding common shares of Denman's Greenhouses Corp
D) 20,000 shares of the 25,000 outstanding common shares of Just Pure Water Co

Question

Quizplus · Accepted Answer

The equity method is used to account for investments in which the investor has significant influence over the investee. Significant influence is generally assumed to exist when the investor owns 20% or more of the voting shares of the investee. In this case, Cannalli owns 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co, which is 30% of the total shares outstanding. Therefore, Cannalli would most likely account for this investment under the equity method.

Cannalli Landscape Architecture Has Invested in Several Domestic Manufacturing Corporations