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An investing company buys shares in another corporation. Which level of ownership of the outstanding shares requires use of the equity method?
AOwnership of less than 20% of the shares
BOwnership of between 20% and 50% of the shares
COwnership of more than 50% of the shares
DOwnership of exactly 10% of the shares
Answer & Solution
Correct answer: B. Ownership of between 20% and 50% of the shares
1. Below 20% ownership gives no significant influence, so the fair value through net income method is used.
2. Ownership of 20% to 50% conveys significant influence, requiring the equity method.
3. More than 50% is treated as a consolidation, not the equity method.
4. 10% falls under the fair value method, so D is wrong.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.2 "Investments in Stock", p.182_
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