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Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March...

Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 20X3. On December 31, 20X3, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or to carry the investment at fair value in reporting their ownership in Flat Flooring.

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

b. Which of the two approaches is likely to show the larger reported contribution to Slanted’s earnings in 20X4? Explain.

c. Why might the use of the equity method become more appropriate as the percentage of ownership increases?

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a. What factors should be considered in determining whether equity-method reporting is appropriate? When considering if the equity method should be used or not depend on if the company has significant influence. APB 18 says if an investor has 20% or more of voting stock it is assumed they have significant influence. Since Slanted Building supplies bought 32% of the voting shares from Flat Flooring Company, it would be appropriate to use the equity-method reporting When a company invests in another firm, whether it is to form a business alliance or just to make a profit, that investment must be accounted for in the balance sheet. Accounting rules prescribes the method to use to report the investment. The cost method and the equity method apply when the ownership interest in the other company is less than a controlling stake Equity method is applied, If the stake is at least 20 percent but less than a controlling stake, and the Investor acquires significant influence. over the investee. Significant-influence investments must be accounted for with the equity method. b. Which of the two methods is likely to show the larger reported contribution to Slanteds earnings in 20X4? Explain The two methods are equity-method and fair value method. Equity method shows a change in the investees income or losses and payouts. Under the market method, the securities are carried on the balance sheet at the fair value. Owing to the fact that prices change regularly the company dealing with trading securities keeps on adjusting their account so as to maintain those assets at their fair market value. . So it depends, if the income is greater than dividends paid, then the equity method would show a larger reported contribution. If income is less than dividends paid then the cost method and fair value method would show a larger reported contribution c. Why might the use of the equity method become more appropriate as the percentage of ownership increases?

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