Question

Question: Your classmate Kate believes that the equity method is applied with a strict application of the “20%” rule. Do you agree? Explain.

Short answer

Answer:

No, because some reason might affect the strict application of the 20% rule.

Step-by-step solution

Definition of 20% rule 

The equity method of the 20% rule states that the voting right of share more than 20% has a significant influence on investee.

Reasons for strict application of 20% rule

The reason that affects the strict application of the 20% rule:

1. Where ownership includes many small groups of shareholders, then the significant influence opposes by these groups of the shareholders.
2. Where the investor holding 20% or more shares fail to influence the board of directors, then the strict application opposes.
3. Where the company rejects the holding of the 20% or more share of an investor

Hence, these are why the 20% rule cannot be strictly applied under the equity method.