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On January 1, 2019, Pearl Corporation purchased 30,000 of the 75,000 outstanding common shares of M. Krab Corporation for $24
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On January 1, 2019, Pearl Corporation purchased 30,000 of the 75,000 outstanding common shares of M. Krab Corporation for $24
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Answer #1

1. Equity method is used to account the investment when the investor is able to exercise significant influence over the operating and financial policies of the investee. For this criteria to be the investor must at least hold 20% -50% of the stake. In this case, Pearl holds 40% ( 30,000/ 75,000) which will result in that ability.

2. Preferred stock generally do not carry any voting rights or have a say in the affairs of the company. Therefore it is not logical to account the same under equity method as this method is used when an entity is able to influence significant control over the operating and financial policies.

3. The two events are:

(I) The ownership of a large minority voting interest i.e. around 40% and no other group owning a significant influence

(ii) The entity is able to dominate the election of the investee's board of directors.

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