Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Given the following data for Garcon Company and Pepper Company, which of the following best describes how Garcon should account for its investment in Pepper if Garcon owns 30% of Pepper's voting stock and has significant influence over Pepper's operations?

Garcon should consolidate Pepper's financial statements with its own.

Garcon should use the cost method to account for its investment in Pepper.

Garcon should use the equity method to account for its investment in Pepper.

Garcon should report the investment as trading securities at fair value.

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Verified step by step guidance

Step 1: Understand the concept of 'significant influence' in accounting. Significant influence typically exists when an investor owns 20% to 50% of the voting stock of another company and has the ability to influence its financial and operational decisions. This is a key factor in determining the appropriate accounting method.

Step 2: Review the ownership percentage. In this case, Garcon owns 30% of Pepper's voting stock, which falls within the range of significant influence (20%-50%). This ownership percentage suggests that Garcon has significant influence over Pepper's operations.

Step 3: Identify the appropriate accounting method for investments with significant influence. According to accounting standards, when an investor has significant influence over an investee, the equity method is typically used to account for the investment. Under the equity method, the investor recognizes its share of the investee's net income or loss in its own financial statements.

Step 4: Compare the equity method to other accounting methods mentioned in the problem. The cost method is used when there is no significant influence, and consolidation is required only when the investor has control (ownership of more than 50%). Reporting the investment as trading securities at fair value applies to investments held for short-term trading purposes, which is not relevant here.

Step 5: Conclude that Garcon should use the equity method to account for its investment in Pepper, as it owns 30% of the voting stock and has significant influence over Pepper's operations.