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:

Amortised Cost

A financial valuation technique that gradually writes off the initial cost of an asset over a period, or the method of allocating the cost of an intangible asset over its useful life.

Effective Interest Rate

The rate that discounts the estimated future cash payments or receipts through the expected life of the financial liability or asset or, when appropriate, a shorter period to the net carrying amount of the financial asset.

Reclassification Date

The specific date on which financial assets are reclassified between different categories, affecting how they are measured and recognized.

Fair Value

The amount one would earn from disposing of an asset or spend in delegating a liability in a seamless trade among market actors on the appointed valuation day.