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Unformatted text preview: APPENDIX D Reporting and Analyzing Investments ANSWERS TO QUESTIONS 7. (a) Whenever the investors influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20% or more ownership interest. Companies are required to use judgement, however, rather than blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another organization would not indicate significant influence. (b) Revenue is recognized as it is earned by the investee. 10. Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as separate component of stockholders equity...
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This note was uploaded on 12/12/2010 for the course ACCT ACCT207 taught by Professor Dragone during the Fall '10 term at University of Delaware.
- Fall '10