Question

Pea Corporation acquired 80 percent of Split Brewing Company's stock on January 1, 20X1, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Split's book value.

True or False: Pea Corporation uses the equity method to account for its investment in Split Brewing Company.

Answer 1

The statement is true because Pea Corporation owns 80 percent of Split Brewing Company, which means it has significant influence and must use the equity method for accounting purposes.

Step-by-step explanation:

Pea Corporation uses the equity method to account for its investment in Split Brewing Company. Considering that Pea Corporation acquired 80 percent of Split Brewing Company's stock, the statement is True. When a company acquires a significant portion of another company's stock, typically more than 50 percent, it has significant influence over the acquired company and therefore must use the equity method for accounting purposes. Under the equity method, the investment is initially recorded at cost, and then adjusted for the investor's share of the investee's income, losses, dividends, and any other comprehensive income components.