Alex Corporation acquired a 40% interest in Calvin Company on June 1, 20X8, for $ 425,000. The management of Alex Corporation is now preparing the first set of financial statements since the acquisition and is unsure about the method of accounting most appropriate for the investment. You are asked for advice.

Required
a) Can Alex report the investment in Calvin using the equity method or the proportionate consolidation method? Under what circumstances would each be appropriate? Are there circumstances under which Alex can use the cost method to report its investment in Calvin? Finally, under which circumstances can Alex use the fair value method to report its investment in Calvin? In each case, fully support your answer by providing all support-ing factors.
b) What are the circumstances under which it would be appropriate for Alex to prepare consolidated financial statements? Identify the extent of control that would be implied by the use of consolidation and give examples of factors that would make consolidation appropriate.