Reference no: EM132785777

You have recently become the controller of Pair Corporation, a manufacturing enterprise that has begun a program of expansion through business combinations. On February 1, 2020, two weeks prior to your controllership appointment, Pair had completed the acquisition of 85% of the outstanding common stock of Sole Company for $225,000 cash, including out-of-pocket costs. You are engaged in a discussion with Pair's chief accountant concerning the appropriate accounting method for Pair's interest in Sole Company's operating results.

The chief accountant strongly supports the cost method of accounting, offering the following arguments:

I. The cost method recognizes that Pair and Sole are separate legal entities.
2. The existence of a 15% non-controlling interest in Subsidiary requires emphasis on the legal separateness of the two companies.
3. A parent company recognizes revenue under the cost method only when the subsidiary declares dividends. Such dividend revenue is consistent with the revenue realization principle of financial accounting. The Investment Income account recorded in the equity method of accounting does not fit the definition of realized revenue.
4. Use of the equity method of accounting might result in Pair's declaring dividends to its shareholders out of "paper" retained earnings that belong to Sole.
5. The cost method is consistent with other aspects of historical-cost accounting, because working paper eliminations, rather than journal entries in ledger accounts, are used to recognize amortization of differences between current fair valves and carrying amounts of Sole's identifiable assets.

Required

Problem 1: Prepare a reply to each of the chief accountant's arguments.