Chapter 2, Problem 2.1C

Choice of Accounting Method
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 a fair value 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 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?