Problem 1-2

Neis Company, one of nine shareholders in InTea Company, owns 12,000 of the 100,000 common shares of InTea. The other eight shareholders each own 11,000 shares of InTea. Neis has entered into a long-term contract with InTea for substantially all of InTeas output. Because of this arrangement, Neis appoints two of the directors of InTea.

Required:

Prepare a memo justifying whether Neis should account for its investment in InTea under the equity method. Include in your discussion any additional information you would like to have and the reason why this information is important in aiding your decision