Final answer:
The general 'cut line' for determining whether fair value or equity method is used in valuing equity securities is 20 percent.
Step-by-step explanation:
The general 'cut line' for determining whether fair value or equity method is used in valuing equity securities is 20 percent.
When an investor owns 20 percent or more of the voting stock of another company, the equity method is used to value the investment. This method allows the investor to recognize a proportionate share of the investee's earnings in their income statement.
On the other hand, when the investor owns less than 20 percent of the voting stock, the fair value method is typically used. Under this method, the investment is reported at fair value on the investor's balance sheet, and any changes in fair value are recognized in the investor's income statement.