Chapter 1, Problem 1Q

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?

To determine

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

Explanation of Solution

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.