Final answer:
The equity method is used when an investor has significant influence but not control over the investee, generally indicated by owning 20% to 50% of the company's stock.
Step-by-step explanation:
When the equity method is used to account for investments in common stock, option 1) The investor has significant influence over the investee is the true statement. This accounting approach is used when an investor holds a significant but not controlling interest in another company, typically defined as ownership of 20% to 50% of the voting stock. It does not confer control over the investee, which would require more than 50% ownership, but it assumes enough influence to affect some decisions.
Under the equity method, the investor records its share of the investee's profits or losses, which adds to or subtracts from the value of the investment on the investor's balance sheet. Dividends received from the investee reduce the carrying value of the investment.
It is important to remember that if an investor possesses control, defined as more than 50% of voting power, consolidation would typically be the appropriate accounting method rather than the equity method, as the investor can exert a significant influence over business decisions and policies.