Accounting Methods for Equity Securities For each of the following independent s

Question

Accounting Methods for Equity Securities For each of the following independent situations, determine the appropriate accounting row used: cost or equity. For cost method situations, determine whether the security should I trading or available for sale. For equity method situations, determine whether consolidated would be required. Explain the rationale for your decision. ATV Company manufactures and sells four-wheel recreational vehicles. It also provides A ¢ its products through its wholly owned subsidiary, RV Insurance Company. 1 Buy Right Inc. purchased 20.000 shares of Big Supply Company common stock to be h i term investment. Big Supply has 200.000 shares of common stock outstanding. e d as Super Tire Manufacturing Co. holds 5.000 shares of the 10,000 outstanding shares of ferred stock of Valley Corporation. Super Tire considers the investment as being long Takeover Company owns 15,000 of the 50,000 shares of common stock of Western S Takeover has tried and failed to obtain representation on Western's board of direct intends to sell the securities if it cannot obtain board representation at the next scheduled in three weeks. stockholders' Espino Inc purchased 50.000 shares of Independent Mining Companv common, has a total of 125.000 common shares outstanding. Espino has no intention to sell foreseeable future.

Explanation / Answer

Answer:

(a)     Equity Method with Consolidation. Even though RV Insurance Company is a nonhomogeneous operation, it should be consolidated because it is a majority-owned subsidiary. (See FASB Statement No. 94.)

(b)    Cost Method (Available for Sale). Buy Right has 10% ownership (20,000/200,000 shares) with no additional information to suggest that significant influence can be exercised.

(c)     Cost Method (Available for Sale). Super Tire holds nonvoting preferred stock. The cost method is used for investments in preferred stock.

(d)    Cost Method (Trading or Available for Sale). While Takeover Company owns 30% (15,000/50,000 shares) of Western’s common stock, it has been unable to obtain representation on Western’s board of directors. This is one of the
specific examples given by FASB Interpretation No. 35, indicating that Takeover does not have significant influence and so must use the cost method. The securities would probably not be classified as trading unless Takeover is in the business of regularly making such investments in order to generate short-term trading profits.

(e)     Equity Method. Espino has 40% (50,000/125,000 shares) ownership and
presumably can exercise significant influence, even though it does not have a controlling interest in Independent Mining.

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