Which of the following is true about a passive investment in common stock?
A)The investing company usually owns less than 20% of the voting stock in the affiliate and the investment is reported on the balance sheet at cost.
B)The investment must not have any voting rights.
C)The fair value method requires unrealized gains and losses to be recognized on the income statement.
D)The investing company usually owns less than 20% of the voting stock in the affiliate and the investment must be reported at fair value on the balance sheet.

Question

Quizplus · Accepted Answer

A passive investment in common stock is an investment in which the investor owns less than 20% of the voting stock in the affiliate. In this case, the investment must be reported at fair value on the balance sheet. The fair value method requires unrealized gains and losses to be recognized in the income statement. Option A is incorrect because it presents the method applicable to an active investment. Option B is incorrect because passive investments may have voting rights. Option C is incorrect because it does not reflect the reporting requirements for passive investments.

Which of the Following Is True About a Passive Investment