For each of the following independent situations, determine the appropriate accounting method to be used: cost or equity. For cost method situations, determine whether the security should be classified as trading or available for sale. For equity method situations, determine whether consolidated financial statements would be required. Explain the rationale for your decision.
(a) ATV Company manufactures and sells 4-wheel recreational vehicles. It also provides insurance on its products through its wholly owned subsidiary, RV Insurance Company.
(b) Buy Right Inc. purchased 20,000 shares of Big Supply Company common stock to be held as a long-term investment. Big Supply has 200,000 shares of common stock outstanding.
(c) Super Tire Manufacturing Co. holds 5,000 shares of the 10,000 outstanding shares of nonvoting preferred stock of Valley Corporation. Super Tire considers the investment as being long-term in nature.
(d) Takeover Company owns 15,000 of the 50,000 shares of common stock of Western Supply Company. Takeover has tried and failed to obtain representation on Western’s board of directors. Takeover intends to sell the securities if it cannot obtain board representation at the next stockholders’ meeting, scheduled in three weeks.
(e) Espino Inc. purchased 50,000 shares of Independent Mining Company common stock. Independent has a total of 125,000 common shares outstanding. Espino has no intention to sell the securities in the foreseeable future.