Final answer:
The question pertains to the application of the equity method in accounting, which is commonly associated with owning 20% to 50% of another company's voting stock but is not strictly applied at a 20% threshold. Significant influence, which may trigger the use of the equity method, can be indicated through ownership or other factors like board representation.
Step-by-step explanation:
The student's question appears to be referencing the equity method of accounting, which is a technique used to assess the profits earned by a company from its investments in other companies. Under the equity method, if an investor has significant influence over an investee, typically indicated by owning 20% to 50% of the voting stock, the investor reports the investment at cost and subsequently adjusts the carrying amount of the investment to recognize the investor's share of the investee's income or loss. This method stands in contrast to cost method or consolidation and reflects the economic realities of the underlying influence the investor has on the investee.
The percentage ownership that would trigger the equity method is not strictly applied; while the threshold is commonly around 20%, significant influence can also be demonstrated through other means such as representation on the board of directors or participation in policy-making processes. Therefore, Kate's understanding that the equity method is strictly applied at 20% ownership is not entirely accurate. It is essential that the determination of whether the equity method should be applied requires careful judgment based on the extent of influence, rather than rigid adherence to a percentage threshold.