Answer :
Given the circumstances provided:
1. Star, Inc. purchased 1,350 shares out of the 9,000 outstanding shares of Moon Co. stock.
2. This ownership represents a minority percentage (1,350 / 9,000 = 15%).
3. Despite the minority ownership, Star has elected a majority of the directors of Moon Co.
A crucial factor in determining how investments should be reported is the level of control or influence an investor has over the investee. In accounting, the following guidelines generally apply:
- If an investor holds less than 20% of the voting stock of the investee, they typically report the investment at cost or fair value, as they lack significant influence.
- If an investor holds between 20% and 50% of the voting stock, it is presumed the investor has significant influence, and the equity method of accounting is usually applied.
- If an investor holds more than 50% of the voting stock, it’s presumed they have control, and consolidation of financial statements is required.
However, even if the investor holds a minority of shares but can elect a majority of the board of directors, it demonstrates control over the investee. Control is the key factor here.
Given:
- Star has elected a majority of the Moon Co. directors.
This demonstrates that Star exhibits control over Moon Co., even with just 15% ownership. Control over the board dictates that consolidation is the correct accounting treatment.
Therefore, the correct answer is:
C. Star should consolidate its financial statements with those of Moon.
1. Star, Inc. purchased 1,350 shares out of the 9,000 outstanding shares of Moon Co. stock.
2. This ownership represents a minority percentage (1,350 / 9,000 = 15%).
3. Despite the minority ownership, Star has elected a majority of the directors of Moon Co.
A crucial factor in determining how investments should be reported is the level of control or influence an investor has over the investee. In accounting, the following guidelines generally apply:
- If an investor holds less than 20% of the voting stock of the investee, they typically report the investment at cost or fair value, as they lack significant influence.
- If an investor holds between 20% and 50% of the voting stock, it is presumed the investor has significant influence, and the equity method of accounting is usually applied.
- If an investor holds more than 50% of the voting stock, it’s presumed they have control, and consolidation of financial statements is required.
However, even if the investor holds a minority of shares but can elect a majority of the board of directors, it demonstrates control over the investee. Control is the key factor here.
Given:
- Star has elected a majority of the Moon Co. directors.
This demonstrates that Star exhibits control over Moon Co., even with just 15% ownership. Control over the board dictates that consolidation is the correct accounting treatment.
Therefore, the correct answer is:
C. Star should consolidate its financial statements with those of Moon.
