When Should a Company Use the Equity Method to Account

question 38

Multiple Choice

When should a company use the equity method to account for an investment in another company's common stock?

• A) The investor intends to hold the common stock for an indefinite period.
• B) The investor has voting control over the investee.
• C) The investor exerts significant influence over the investee.
• D) The investor exerts managerial control over the investee.

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Definitions:

Residual Value

The estimated salvage value an asset will have at the end of its useful life.

Manufacturing Equipment

Machinery and tools that are used in the process of producing goods in a manufacturing facility.

Salvage Value

Salvage Value is the estimated residual value of an asset at the end of its useful life, expected to be recovered once the asset is no longer useful in operations.

Straight-Line Method

A method of allocating the cost of an asset evenly across its useful life for accounting and depreciation purposes.