Which of the Following Statements Applying to the Use of the Equity

question 7

Multiple Choice

Which of the following statements applying to the use of the equity method versus the cost method is true?

• A) The equity method is required when one firm owns 20% or more of the common stock of another firm.
• B) If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods.
• C) The method used has no significance to consolidated statements.
• D) An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet.

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Definitions:

Zero Coupon Bond

A bond issued at a discount and repaid at face value at maturity without periodic interest payments.

Percentage Increase

A measure of the degree to which a quantity grows over a period of time, calculated as the change in value divided by the original value and expressed as a percentage.

Interest Rate Price Risk

The potential for an investment’s value to change due to a fluctuation in the absolute level of interest rates, illustrating the inverse relationship between price and interest rates.

Zero Coupon Bond

A bond that does not pay periodic interest payments but instead is issued at a discount to its redemption value.