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Question - Big Corporation purchased 10% of Small Corporation on Jan 1, 2012 for $300,000 and classified the investments as an available-for sale security. Big acquires an additional 15 per cent of Small on January 1, 2013 for $450,000 and now Big accounts investment in Small under equity method. Small reports income of $50,000 and $80,000 in 2012 and 2013 respectively and pays dividends of $20,000 in each of these two years.
a. How does Big initially determine the income to be reported in 2012 in connection with its ownership of Small?
b. What factors should influence Big in its decision to apply the equity method in 2013
c. In comparative statements for 2012 and 2013 how would Big determine the income to be reported in 2012 in connection with its ownership of Small? Why is this accounting appropriate?
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