Company A and Company B entered into a joint venture to manufacture components used by both companies.
Question:
Company A and Company B entered into a joint venture to manufacture components used by both companies. The JV has been quite successfully for a number of years. Company A & B both contributed 50 percent of the equity when the joint venture was created. Company A purchases roughly 70 percent of the output of the joint venture and Company B purchases 30 percent. Company A & B have equal representation on the JV’s board of directors and participate equally in its management. JV profits are distributed at year-end based on total purchases by each company.
Required for Initial Discussion Post:
Company A has been using the equity method to report its investment in the joint venture; however,
A’s financial vice president believes that each company should use pro rata consolidation. As a senior accountant at Company A, you have been asked to discuss those situations in which pro-rata consolidation may be appropriate.
What are your recommendations for Company A to continue to use the equity method or switch to pro rata consolidation? Remember to include citations using independent and authoritative support for your discussion.
Financial Accounting An Introduction to Concepts, Methods and Uses
ISBN: 978-1133591023
14th edition
Authors: Roman L. Weil, Katherine Schipper, Jennifer Francis