At 31 December 2010, Cinnamon’s shareholders’ equity on its balance sheet would most likely be:

A. highest if Cinnamon is deemed to have control of Cambridge.

B. independent of the accounting method used for the investment in Cambridge.

C. highest if Cinnamon is deemed to have significant influence over Cambridge.

Cinnamon, Inc. is a diversified manufacturing company headquartered in the United Kingdom. It complies with IFRS. In 2009, Cinnamon held a 19 percent passive equity ownership interest in Cambridge Processing that was classified as available-for-sale. During the year, the value of this investment rose by £2 million. In December 2009, Cinnamon announced that it would be increasing its ownership interest to 50 percent effective 1 January 2010 through a cash purchase. Cinnamon and Cambridge have no intercompany transactions.

Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon’s consolidated financial statements. He asks Cinnamon’s CFO how the company will account for the investment, and is told that the decision has not yet been made. Lubbock decides to use his existing forecasts for both companies’ financial statements to compare the outcomes of alternative accounting treatments.

Lubbock assembles abbreviated financial statement data for Cinnamon (Exhibit 1) and Cambridge (Exhibit 2) for this purpose.

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EXHIBIT 1 Selected Financial Statement Information for Cinnamon, Inc. ( Millions) Year ending 31 December Revenue Operating income 2009 1,400 126 62 2009 1,170 616 2010* 1,575 142 69 2010* 1,317 685 Net income 31 December Total assets Shareholders' equity *Estimates made prior to announcement of increased stake in Cambridge.