Question

What factors indicate if the equity method should be used for an investment in another firm's equity securities?

A)investor representation on the investee's board of directors
B)technological dependency between the investor and investee
C)investor participation in the policy making process of the investee
D)the investor purchases shares of the investee

Answer 1

The factors that indicate if the equity method should be used for an investment in another firm's equity securities are investor representation on the investee's board of directors, investor participation in the policy making process of the investee, and the investor purchasing shares of the investee.

Step-by-step explanation:

The factors that indicate if the equity method should be used for an investment in another firm's equity securities are:

1. Investor representation on the investee's board of directors: If the investor has representation on the investee's board of directors, it suggests a significant level of influence and control over the investee, which may warrant the use of the equity method.
2. Investor participation in the policy making process of the investee: If the investor is actively involved in the policy making process of the investee, it indicates a substantial degree of control and influence, making the use of the equity method appropriate.
3. The investor purchases shares of the investee: When the investor acquires shares of the investee, it shows an ownership interest and potential impact on the investee's financial performance, supporting the use of the equity method.