Asked by Angel Martinez on Apr 25, 2024
Verified
The Waco Company acquired an 18% interest in the outstanding common stock of the Springfield Company.The Waco Company can exercise significant influence over the operating and financial policies of the Springfield Company.The Waco Company should account for its investment in the Springfield Company by using the
A) equity method
B) cost method
C) securities held to maturity method
D) lower of cost or market method
Significant Influence
The capacity to affect the financial and operating policies of another entity through ownership or other means.
Operating Policies
Rules and guidelines that govern the activities and decisions of an organization.
Equity Method
An accounting technique used to record investments in other companies when the investor has significant influence but does not have full control.
- Understand thoroughly and execute the equity method in accounting for investments.
Verified Answer
LD
Linda Dobele6 days ago
Final Answer :
A
Explanation :
According to the statement, The Waco Company can exercise significant influence over the operating and financial policies of the Springfield Company. Therefore, the equity method should be used to account for the investment in the Springfield Company, as it allows for the recognition of the investor's share of the investee's earnings and losses on a proportional basis. The cost method (B) is appropriate for investments where the investor has no significant influence or control over the investee's operations, while securities held to maturity method (C) and lower of cost or market method (D) are not applicable to equity investments in common stock.
Learning Objectives
- Understand thoroughly and execute the equity method in accounting for investments.