Fundamentals of Advanced Accounting

A company acquires a rather large investment in another corporation. What criteria determine whether the investor should apply the equity method of accounting to this investment?

Identify the criteria which determine whether the investor should apply the equity method of accounting to this investment or not.

Identify the criteria which determine whether the investor should apply the equity method of accounting to this investment or not.

The criteria for determining whether the investor should apply the equity method of accounting to this investment or not is as follows: The investor should invest at least 20% or it should acquire at least 20% of the investee’s share. The investor should be able to exercise the significant influence over the investee. If the above two conditions are fulfilled then the organization can use the equity method.

The criteria for determining whether the investor should apply the equity method of accounting to this investment or not is as follows:
<ul>
<li>The investor should invest at least 20% or it should acquire at least 20% of the investee&#x2019;s share.</li>
<li>The investor should be able to exercise the significant influence over the investee.</li></ul>
If the above two conditions are fulfilled then the organization can use the equity method.

A company acquires a rather large investment in another corporation. What criteria determine whether the investor should apply the equity method of accounting to this investment?

Explanation of Solution