Discussion $1\mathrm{.}1$ Does the Equity Method Really Apply Here?

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Abraham, Inc., a New Jersey corporation, operates $57$ bakeries throughout the northeastern section of the United States. In the past its founder, James Abraham, owned all the company's outstanding common stock. However, during the early part of this year, the corporation suffered a severe cash flow problem brought on by rapid expansion. To avold bankruptcy, Abraham sought additional Investment capital from a friend, Dennis Bostich, who owns Highland Laboratories. Subsequently, Highland paid $$700,000$ cash to Abraham, Inc., to acquire enough newly lssued shares of common stock for a one$-$chird ownership interest.

At the end of this year, the accountants for Highland Laboratories are discussing the proper method of reporting this investment. One argues for maintaining the asset at its original cost $($using the cost method$)$: This purchase is no more than a loan to ball out the bakeries. Mr$.$ Abraham will continue to run the organization with littie or no attention paid to us$.$ After all, what does anyone in our company know about baking bread? I would be surprised if Abraham does not reacqu're these shares as soon as the bakery business is profitable agin."

One of the other accountants disagrees, stating that the equity method is appropriate. $$ realize that our company is not capable of running a bakery. However, the official rules state that we must have only the abilly to exert slgnificant influence. With one$-$chird of the common stock in our possession, we certainly have that ability. Whether we use it or not, this ability means that we are required to apply the equity method."

How do you think Highland Laboratories should account for It's investment in Abraham, Inc. $($Cost or Iqulty Method$)$P Please make sure to provide enough detail to justify why you selected your answer.