Question #55
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 24
Status: Unattempted
Correct Answer: A
Question
GTH Corporation has just purchased 18% of the common stock of Pittor Corporation, one of their major suppliers, making GTH the largest single shareholder in Pittor. The primary motivation for the purchase is that managerial problems at Pittor have resulted in quality control difficulties, thereby affecting the reliability of several critical component parts for GTH products. At the time of the purchase, GTH management announced they plan to be an active investor and exercise significant influence on Pittor so the quality problems can be resolved. Given these circumstances, the accounting method used to record the intercorporate investment will most likely be the:
Answer Choices:
A. equity method
B. acquisition method
C. investment in financial assets method
Explanation
Normally, due to the less than 20% ownership stake, investment in financial assets
accounting would be used to record this investment. However, percentage ownership
rules are guidelines only and the appropriate accounting method is dependent on the
degree of influence the acquirer intends to exert. In this case, GTH has announced their
desire to exert significant influence, hence, the equity method is the appropriate choice.