Rose Corporation and Krome Company established a joint venture to manufacture components for both companies’ use on January 1, 20X1, and have operated it quite successfully for the past four years. Rose and Krome both contributed 50 percent of the equity when the joint venture was created. Rose purchases roughly 70 percent of the output of the joint venture and Krome purchases 30 percent. Rose and Krome have equal numbers of representatives on the joint venture’s board of directors and participate equally in its management. Joint venture profits are distributed at year-end on the basis of total purchases by each company.

Required
Rose has been using the equity method to report its investment in the joint venture; however, Rose’s financial vice president believes that each company should use pro rata consolidation. As a senior accountant at Rose, you have been asked to prepare a memo discussing those situations in which pro rata consolidation may be appropriate and to offer your recommendation as to whether Rose should continue to use the equity method or switch to pro rata consolidation. Include in your memo citations of and quotations from the authoritative literature to support your arguments.