Answer as soon as possible thanks International Inc. owns companies or the stock

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Answer as soon as possible thanks

International Inc. owns companies or the stock of companies in countries all over the world. International is reviewing its methods of accounting for those companies and has asked you to provide input as to whether the cost method, the equity method, or consolidation is appropriate for each of the following subsidiaries. Provide justification for your suggestions. Subsidiary 1: This subsidiary, MEOil, is an oil company located in the Middle East. A growing anti- American sentiment in the country in which the company is located has led International to remove all non-native employees. There is a growing fear that the government may nationalize MEOil. International Inc. owns 75% of the oil company. Subsidiary 2: Ecological Inc., a company that produces environmentally safe products, has production facilities in more than 10 states. The ownership of the company is widely held, with International Inc. holding the largest block of stock. International has succeeded in placing its president and vice president in two of the five board of directors’ seats of Ecological Inc. International owns 15% of Ecological Inc.’s outstanding stock. Subsidiary 3: International Inc. recently purchased 100% of the outstanding stock of Harmon National Bank. This subsidiary represents International’s first purchase of a nonmanufacturing facility, and management has expressed concern about the comparability of the different accounting methods used by financial institutions 4. Subsidiary 4: International has been involved in a takeover battle with Beatrix Inc. involving Campton Soups. Beatrix recently purchased 50% of the stock of Campton. International has owned 30% of Campton’s stock for five years.

Explanation / Answer

The method of accounting for investment in other companies depends on the quantum of stake in that company. Other factors will not effect the accounting method.

a. Cost Method: The cost method should be used when the investment results in an ownership stake of less than 20%

b. Equity Method: This method should be used when the equity investments are, usually 20% to 50%, in associate companies.

c. Consolidation Method: For more than 50% stake, that is when companies convert into subsidairies.

Subsidiary 1: Since, investment is more than 75%, so consolidation should be preferred.

Subsidiary 2: Cost method, because the investment is 15%.

Subsidiary 3: 100% Stake, Consolidation Method

Subsidiary 4: Investments in Campton only will be accounted by Equity Method, since stake is 30%

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