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What types of investments in common stock normally are accounted for using ( i) the equity...

What types of investments in common stock normally are accounted for using ( i) the
equity method and ( ii ) the cost method?

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Answer #1

Answer:

(a)    An investment in the voting common stock of another company is reported on an equity-method basis when the investor is able to significantly influence the operating and financial policies of the investee.

(b)    The cost method normally is used for investments in common stock when the investor does not have significant influence and for investments in preferred stock and other securities. The cost method may also be used by the parent company for bookkeeping purposes when the investor owns a controlling interest because the investment account is eliminated in the consolidation process.

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