Question

If the cost method is used to account for a long-term investment in common stock:____.

Answer 1

Answer:

net income of the investee is not considered earned by the investor until dividends are declared by the investee

Explanation:

Cost method can be regarded as

a method that is utilized when the influence of the investor over the investment that which he owns is just little or no influence , this could be typically described as owning less than 20% of the company. The investment will be recorded in the asset section of the balance sheet at historical cost. When an investment is made by an investing entity and the investment is having following two criteria, then the investment can be accounted for by the investor using the cost method.

Those criteria are;

1) There is no substantial influence by the investor over the investee.

2)There is no easily determinable fair value for the investment.

This cost method is best method when making a passive as well as long-term investment which doesn't result to influence over the company.

It should be noted that If the cost method is used to account for a long-term investment in common stock, then net income of the investee is not considered earned by the investor until dividends are declared by the investee