If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:
A) Would record dividends received from Son Company as investment revenue.
B) Would increase its investment account when Son Company declares dividends.
C) Would record 40% of the net income of Son Company as investment income each year.
D) All of these answer choices are correct.

Question

Quizplus · Accepted Answer

When a company exercises significant influence over another company and owns a substantial portion of its stock (typically 20%-50%), it uses the equity method of accounting. Under the equity method, the investor recognizes its share of the investee's net income or loss as investment income. Therefore, Pop Company would record 40% of Son Company's net income as investment income each year. Dividends received under the equity method are considered returns on investment and result in a decrease in the carrying value of the investment, contradicting choices A and B.

If Pop Company Exercises Significant Influence Over Son Company and Owns