Given the following data for Garcon Company and Pepper Company, which of the following best describes how Garcon should account for its investment in Pepper if Garcon owns 30% of Pepper's voting stock and has significant influence over Pepper's operations?

• A. Garcon should consolidate Pepper's financial statements with its own.
• B. Garcon should use the cost method to account for its investment in Pepper.
• C. Garcon should use the equity method to account for its investment in Pepper.
• D. Garcon should report the investment as trading securities at fair value.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of 'significant influence' in accounting. Significant influence typically exists when an investor owns 20% to 50% of the voting stock of another company and has the ability to influence its financial and operational decisions. This is a key factor in determining the appropriate accounting method.
2. Step 2: Review the ownership percentage. In this case, Garcon owns 30% of Pepper's voting stock, which falls within the range of significant influence (20%-50%). This ownership percentage suggests that Garcon has significant influence over Pepper's operations.
3. Step 3: Identify the appropriate accounting method for investments with significant influence. According to accounting standards, when an investor has significant influence over an investee, the equity method is typically used to account for the investment. Under the equity method, the investor recognizes its share of the investee's net income or loss in its own financial statements.
4. Step 4: Compare the equity method to other accounting methods mentioned in the problem. The cost method is used when there is no significant influence, and consolidation is required only when the investor has control (ownership of more than 50%). Reporting the investment as trading securities at fair value applies to investments held for short-term trading purposes, which is not relevant here.
5. Step 5: Conclude that Garcon should use the equity method to account for its investment in Pepper, as it owns 30% of the voting stock and has significant influence over Pepper's operations.