Question

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with

Answer 1

Adrianna Company should record the investment in Saddle Company's stock as an equity method investment.

Step-by-step explanation:

Adrianna Company should record the investment in Saddle Company's stock as an equity method investment. The equity method is used when one company has significant influence over another, but does not have control. According to Accounting Standards, significant influence is generally considered to exist when an investor owns 20% or more of the outstanding stock of another company.

Since Adrianna Company purchased 35% of Saddle Company's outstanding stock, they have significant influence and should use the equity method. Under the equity method, the initial investment is recorded at cost, which in this case is $450,000. The investment is then adjusted for the investor's share of the investee's earnings or losses.