Question

If an investor owns less than 20% of the common stock of another corporation as an investment.

a. it is presumed that the investor has relatively little influence on the investee.
b. no dividends can be expected.
c. it is presumed that the investor has significant influence on the investee.
d. the equity method of accounting for the investment should be employed.

Answer 1

Answer:

The correct answer is letter "A": it is presumed that the investor has relatively little influence on the investee.

Explanation:

According to the United States Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standard (IFRS), investments between 20% and 50% of the voting stock of a different company are considered minority. Minority appears as noncurrent assets on the balance sheet.

Then, if an investor has less than 20% of the common stock of another company, it implies that investor has few to no influence on the investee.