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Choice of Accounting Method - Slanted Building Supplies

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Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 2003. On December 31, 2003, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or cost method in reporting their ownership in Flat Flooring.

Required:

a. What factors should be considered in determining whether equity-method reporting is appropriate?
b. Which of the two methods is likely to show the larger reported contribution to Slanted's earnings in
2004? Explain.
c. Why might the use of the equity method become more appropriate as the percentage of ownership
increases?

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Solution Summary

This posting discusses the difference between the equity method and cost method in the context of building industry. It also evaluates the appropriateness of each method in the situation. 411 words.

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Choice of Accounting Method

a. What factors should be considered in determining whether equity-method reporting is appropriate?

According to the FASB Interpretation No. 35 of Opinion No. 18, the Equity method of reporting should be applied for investments of 50 percent or less of voting stock of an investee enterprise, The Equity Method of Accounting for Investments in Common Stock state that use of equity method of accounting for investment is required if the investor has the ability to exercise significant influence over operation and financial policies of the investor. There is an assumption that if the share holding is ...

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