Companies often acquire ownership in other companies using a variety of ownership arrangements. The investor should use equity-method reporting whenever:

 Companies often acquire ownership in other companies using a variety of ownership arrangements. The investor should use equity-method reporting whenever:

Multiple Choice

The investor purchases goods and services from the investee.


The investor has significant influence over the operating and financing decisions of the investee. Correct

The investor purchases voting common stock of the investee.


There is no differential included in an investment; the carrying value of the investment is less than the market value of the investee’s shares held by the investor.

Explanation
1.

Equity method reporting is used when an investor gains significant influence over the operating and financing decisions of the investee. Typically, this is satisfied by maintaining 20% or more of the voting stock, but can also be obtained by other contractual obligations or circumstances.

(The investor purchases voting common stock of the investee.) Incorrect. Voting shares can be obtained without gaining significant influence (i.e. less than 20%) and thus the equity method is not typically used.
(The investor purchases goods and services from the investee.) Incorrect. Purchasing goods and services would not constitute significant influence over the company, and thus does not result in the equity method being applied.
(When there is no differential included in an investment, the carrying value of the investment is less than the market value of the investee’s shares held by the investor.) Incorrect. This would result in a write-down of the investment, and does not correlate to the use of the equity method.