Multiple Choice
Which one of the following capital budgeting techniques is generally preferred for evaluating most investment projects?
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7. Receivables and Investments
Introduction to Investments in Securities
Struggling with Financial Accounting?
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At what percentage of investment ownership is significant influence over an investee generally presumed under accounting standards?
A
Less than 10%
B
50% or more
C
20% or more, but less than 50%
D
10% to 19%
Verified step by step guidance1
Understand the concept of 'significant influence' in accounting standards. Significant influence refers to the ability of an investor to participate in the financial and operating policy decisions of the investee, but not control those policies.
Review the accounting guidelines for investment ownership percentages. Generally, significant influence is presumed when an investor owns 20% or more, but less than 50% of the voting stock of the investee.
Recognize that ownership percentages below 20% typically do not indicate significant influence unless there is evidence of other factors, such as representation on the board of directors or participation in policy-making processes.
Ownership percentages of 50% or more usually indicate control rather than significant influence, and the investment would be accounted for using consolidation rather than the equity method.
Conclude that the correct range for significant influence under accounting standards is 20% or more, but less than 50%, as this is the threshold where the equity method of accounting is typically applied.
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