When a Company Holds Between 20% and 50% of the Outstanding

question 21

Multiple Choice

When a company holds between 20% and 50% of the outstanding ordinary shares of an investee, which of the following statements applies?

• A)The investor should always use the equity method to account for its investment.
• B)The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
• C)The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
• D)The investor should always use the fair value method to account for its investment.

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Definitions:

Network Effects

The phenomenon whereby a service becomes more valuable as more people use it, thereby encouraging even more users to join.

Capital Requirements

The total amount of capital needed for a business to carry out its operations, including costs for assets, staffing, and day-to-day expenses.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Undifferentiated Products

Goods or services that are viewed as interchangeable with others in the market, lacking distinct features to stand out from competitors.