Floyd's Specialty Foods Inc. (FSFI) operates over 60 shops throughout Ontario. The company was founded by George
Question:
At the end of this year, CAI's accountants are discussing how they should properly report this investment in the company's financial statements.
One argues for maintaining the asset at original cost, saying, "What we have done is to advance money to bail out these stores. Floyd will continue to run the organization with little or no attention to us, so in effect we have lent him money.
After all, what does anyone in our company know about the specialty food business? My guess is that as soon as the stores become solvent, Floyd will want to buy back our shares."
Another accountant disagrees, stating that the equity method is appropriate. "I realize that our company is not capable of running a specialty food company.
But the requirements state that ownership of over 20% is evidence of significant influence."
A third accountant supports equity method reporting for a different reason.
"If the investment gives us the ability to exert significant influence, that is all that is required. We don't have to actually exert it. One-third of the common shares certainly give us that ability."
Required:
How should CAI report its investment? Your answer should include a discussion of all three accountants' positions.
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Related Book For
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell
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