On January 2, 2013, Pedal Corporation purchased 25% of the outstanding common stock of Sedda Corporation for $100,000 cash. Book value and fair value of Sedda's assets and liabilities at the time of acquisition are shown below. a. When should the investor use the equity and fair value method? b. Describe the equity method of accounting and why it is referred as "one line consolidation?

 

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Assets Cash Accounts receivable Inventories Equipment Liabilities & Equities Accounts payable Note payable Capital stock Retained earnings Book Fair Values Values $40,000 $40,000 100,000 90,000 40,000 50,000 180,000 210,000 $360,000 $390,000 $110,000 50,000 100,000 100,000 $360,000 $110,000 40,000 $150,000 Assets Cash Accounts receivable Inventories Equipment Liabilities & Equities Accounts payable Note payable Capital stock Retained earnings Book Fair Values Values $40,000 $40,000 100,000 90,000 40,000 50,000 180,000 210,000 $360,000 $390,000 $110,000 50,000 100,000 100,000 $360,000 $110,000 40,000 $150,000

Answer rating: 100% (QA)

a The investor should use the equity method when they have significant influence over the investee but not full control typically represented by an ownership interest of 20 to 50 The fair value method is used when the investor has less than 20 ownership and no significant influence over the investee b ... View the full answer