12 Explain why rule of thumb does not apply in a situation w

12. Explain why rule of thumb does not apply in a situation where two investors own an investee, one twenty-five percent and the other seventy-five percent.

Solution

Generally for investments with a share of 20% - 50% require the investor to apply equity method for the respective investments. It is followed because, it is assumed that the investor has a significant influence in the affairs of the Investee\'s business.

But in this case, the investee is having only 2 investors, one has 75% share and the other has 25% share.

The minority share is 25%, eventhough it is greater than 20%, the minority share investor can\'t follow equity method because it is clear in this case that it can\'t influence the decisions of the Investee.