Cost or Equity Method and Analysis
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Since Boomer Company's inception, Madison Company has owned 18 percent of Boomer's outstanding common stock. Madison provides three key management personnel to Boomer and purchased 25 percent of Boomer's output during 20X7. Boomer is profitable. On January 2, 20X8, Madison purchased additional common stock to finance Boomer's expansion, thereby becoming a 30 percent owner. Boomer's common stock does not have a quoted market price. The stock has always been issued at its book value, which is assumed to approximate its fair value.
Required
a. In general, distinguish between investor-income reporting under the cost method and under the equity method. Which method is more consistent with accrual accounting? Why?
b. Prior to January 2, 20X8, what specific factors should Madison have considered in determining the appropriate method of accounting for its investment in Boomer?
c. Assume that Madison used the cost method in accounting for its investment in Boomer prior to January 2, 20X8. Describe the book adjustments required on January 2, 20X8, when Madison became owner of 30 percent of Boomer's outstanding common stock.
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Solution Summary
Cost or equity method and analysis for Boomer Company`s inception and Madison Company is examined.
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Income reported under the cost method is comprised of the share of the investor on the dividends paid by the investee while an investor would recognize its ...
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