Janet, Brian, and Natalie have been approached by Ken Thornton, a shareholder of La Madeleine Ltd., a private company. Ken wants to retire and would like to sell his 1,000 shares in La Madeleine, which represent 20% of all shares issued. La Madeleine is currently operated by Ken’s twin daughters, who each own 40% of the common shares. La Madeleine operates a bakery that specializes in making fancy French cookies.

The business has been operating for approximately five years, and in the last two years, Ken has lost interest and left the day-to-day operations to his daughters. Both daughters at times find the work at the bakery overwhelming. They would like to have a third shareholder involved to take over some of the responsibilities of running a small business. Both feel that Janet, Brian, and Natalie are entrepreneurial in spirit and that their expertise would be a welcome addition to the business operation.

Ken has met with Janet, Brian, and Natalie to discuss the business operation. All have concluded that there would be many advantages for Koebel’s Family Bakery Ltd. to acquire an interest in La Madeleine Ltd. One of the major advantages would be the sale of fancy French cookies and Koebel’s cupcakes at both bakeries.

Despite the apparent advantages, Janet, Brian, and Natalie are still not convinced that they should participate in this business venture. They come to you with the following questions:

1. We are a little concerned about how much influence we would have in the decision-making process for La Madeleine Ltd. Would the amount of influence we have affect how we account for this investment? (Recall that Koebel’s Family Bakery Ltd. reports using ASPE.)
2. Can you think of other advantages of going ahead with this investment?
3. Can you think of any disadvantages of going ahead with this investment?

Instructions
(a) Answer Janet, Brian, and Natalie’s questions.
(b) What other information would you likely obtain before you recommend whether this investment should be accounted for using the equity method?
(c) Explain to Janet, Brian, and Natalie some of the differences in accounting for this investment on Koebel’s Family Bakery Ltd.’s balance sheet if the cost method was chosen instead of the equity method.