If a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment,which method would the investor normally use to account for this investment?
A)Equity method
B)Market value method
C)Historical cost method
D)Straight-line method
E)Effective method

Question

Quizplus · Accepted Answer

The equity method is used when a company owns between 20% to 50% of the stock of another company as a long-term investment. This method allows the investor to recognize their share of the investee's profits or losses on their income statement. The market value method is not used for long-term investments as it focuses on short-term fluctuations in stock prices. The historical cost method is used for fixed assets and inventory, but not for investments. The straight-line method is used for depreciation, not investments. The effective method is not a recognized accounting method.

If a Company Owns More Than 20% of the Stock