MA9-52. Determining the Reporting of an Investment

Assume your company acquires 20% of the outstanding common stock of APEX Software as an investment.

You also have an option to purchase the remaining 80%. APEX is developing software (its only

activity) it hopes to eventually package and sell to customers. You do not intend to exercise your option

unless its software product reaches commercial feasibility. APEX has employed your software engineers

to assist in the development efforts, and you are integrally involved in its software design. Your ownership

interest is significant enough to give you influence over APEX's software design specifications.

Required

a. Describe the financial statement effects of the three possible methods to accounting for this

investment (fair value, equity, and consolidation).

b. What method of accounting is appropriate for this investment (fair value, equity, or

consolidation)? Explain.