Schweser QBank Inter-Corp Investment Q

Acme Corporation purchases a 3% interest in Bandy Company to become the single largest shareholder of Bandy. Acme will hold a seat on the Board of Directors of Bandy. Acme will account for its investment in Bandy using the: A) lower of cost or market method. B) equity method. C) acquisition method. Your answer: C was incorrect. The correct answer was B) equity method. Even though Acme’s interest is low at only 3%, they have significant influence by having a seat on Bandy’s Board of Directors. As such, they must use the equity method. I think it should be acquisition method since it have influence to the company?

Acquisition only when you have “control”. Equity when you have “significant influence” In this case it should be Equity method Eg: if there were total 10 board members and Acme had 6 or more members on Bandy’s Board, Acme has control. But if Acme only has 1 board member on Bandy’s board, it only has influence