On October 1, 2026, ABC acquired 28% of the outstanding shares of Econo Fitness, a Japanese manufacturer of gym equipment, for CAD 1,500,000. ABC expanded into Mexico in 2025 and believes this purchase can further aid in the expansion into Japan. As part of the shareholder agreement, Crystal represents ABC on the Econo Fitness Board of Directors. The Board of Directors determine dividend distribution. ABC also expect there to be synergies between ABC and Econo Fitness, with material transactions between the two companies. Currently, the investment is carried at cost (CAD 1,500,000), as per Jessica, the VP finance of ABC, this is an accounting policy choice for companies. Jessica did not want to account for it under the equity method of accounting given this would lead to more volatile earnings. For instance, from October 1 to December 31, Econo Fitness had $500,000 of losses, and did not give out any dividends. Thus, it would be more beneficial for ABC to record the investment at cost.

( It is now 2027 march)

Discuss if the accounting treatment was correct, and if it isn't, indicate the correct accounting trreatment. Also specify (if possible)

1. The impacts of this transaction on the financial statements of FFA, quantified when possible,

2.and the impact on the key Earnings Before Taxes & the Total Liabilities to Total Assets ratio, quantified.

Answer rating: 100% (QA)

The accounting treatment chosen by ABC to carry the investment in Econo Fitness at cost instead of using the equity method may not be the most appropriate in this scenario especially considering the m... View the full answer