Smithers & Reilly is a health-care consultancy firm located in the United States. During a recent conference, J.M. Smithers, the firm’s chairman and chief executive officer, met with representatives from a health-care consultancy firm Tata and Associates that, he believed, would be an excellent joint venture partner for Smithers & Reilly. As yet, Mr. Smithers and the representatives from Tata have only had preliminary discussions. But, it’s evident that along with the various legal, tax, and operational issues to consider before deciding on a joint venture relationship, they must consider the accounting implications also. So, Mr. Smithers and the Tata representatives want you to give them guidance on the accounting for their proposed business arrangement, which at this early stage, is as follows: • Smithers & Reilly will acquire between 10% and 25% of the voting common stock of Tata and Associates. • The two companies will work closely coordinating their cross-border business activities, including sharing intellectual property and technological support, when necessary, at an agreed cost-based rate. • If, at any point in their arrangement, Smithers & Reilly’s equity investment in Tata exceeds 15% of the outstanding voting common stock, Smithers & Reilly will be permitted to elect two members of Tata’s board of directors and they will gain the right to review and approve any long-term debt financing arrangements entered into by Tata. • At no time will Smithers & Reilly’s equity investment in Tata Associates to 25%. Tata and Associates common stock is actively traded on the NSE, the National Stock Exchange of India, Limited. Required Mr. Smithers asks you to give him a short and concise write-up summarizing the accounting for their investment in Tata and Associates, if their investment is: A. Less than 15% of the outstanding voting common stock of Tata and Associates B. 15 – 20% of the outstanding voting common stock of Tata Associates. C. 20 – 25% of the outstanding voting common stock of Tata Associates. Your comments should address Smithers and Reilly’s accounting for 1. The original investment in Tata and Associates, 2. Dividends declared and paid by Tata and Associates, and 3. Income and losses generated by Tata and Associates, including Smithers & Reilly’s accounting requirements when and if, losses incurred by Tata and Associates causes Smithers & Reilly’s investment account balance to decrease to zero or less, if applicable. 4. You can assume that, even with a 25% investment in its voting common stock, Smithers and Reilly will not have controlling interest in Tata Associates, as defined in U.S. GAAP.

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A Smithers and Reillys have less than 15 investment in outstanding voting common stock of TATA and A... View the full answer