Question

Which statement regarding investments in equity securities is​ incorrect? A. Investments in equity securities are classified into three specific types based on the​ investor's level of influence over the investee company. B. ​Generally, no significant influence exists if there is an ownership interest of less than​ 20% of the​ investee's voting stock. C. Significant influence equity investments are consolidated into the​ investor's financial statements. D. Significant influence equity investments are always reported as​ long-term assets on the balance sheet.

Answer 1

Answer: C. Significant influence equity investments are consolidated into the investor’s financial statements.

Significant influence equity investments are not consolidated into the investor’s financial statements but are reported as investments. Hence, statement C. is incorrect.

Investments in equity securities are classified into three specific types based on the investor’s ownership in the investee company of less than 20%, between 20% and 50%, and more than 50%. Hence, statement A. is correct.

Significant influence is deemed to exist only if the ownership interest is more than 20%. Thus, if ownership interest is less than 20%, no significant influence exists. Hence, statement B. is correct.

Significant influence equity investments are reported on the balance sheet as long-term investments and hence statement D. is correct.