1. In Year 1, Major bought 5% of the shares of Minor when they were worth a total of $300,000. By the end of Year 3, the shares were worth $325,000. It accounted for this investment in years 1, 2, and 3 on the fair value method. On Day 1, Year 4, Major bought another 40% of the shares of Minor for $2,600,000, and switches to the equity method of accounting for this investment. Which of the following is correct about the appropriate accounting under GAAP?

A		The Year 4, Day 1 balance for the Investment in Minor account should equal $2,900,000, equal to the cost of $300,000 for the first 5% plus the cost of the remaining 40%. No adjustments are needed to the Years 1, 2, and 3 financial statements
B		The Year 4, Day 1 balance for the Investment in Minor account should equal $2,925,000, equal to the carrying value at the end of Year 3 of $325,000 for the first 5% (which includes the adjustment to fair value) plus the cost of the remaining 40%. No adjustmentsare needed to the Years1, 2, and 3 financial statements
C		Adjustments are needed to Years 1, 2, and 3 results to assume that the equity method had been used for all three years. The Year 4, Day 1 Investment in Minor would then be found by adding the equity basis carrying amount for the 5% of stock to the $2,600,000 cost of the 40% bought in Year 4. The financial statements of Years 1, 2, and 3 would be restated.
D		Same as answer 3, except that the financial statements of years 1, 2, and 3 would not be restated. Instead, Year 4s statements would include a Prior Period Adjustment in the shareholders equity statement to record the difference between what the retained earnings would have been in the equity basis had been used, and what had been reported in the prior years.

2. Giant buys 10% of the shares in Medium. Mediums stock is publicly traded. Assuming there is no other relevant information, which accounting method should Giant use for this investment?

A		Cost
B		Fair value
C		Equity
D		Either Equity or Fair value are acceptable