The Following data are the taken from the December 31 annual report of Bailey Company:

Bailey had 1,000,000 common shares outstanding during this entire period and there is no public market for Bailey Company shares. Also, during this period, Simpson Corp. Bought Bailey shares for cash, as follows:

January 1, 2004 10,000 shares at $10 per shares

January 1, 2005 290,000 shares @ $11 per share, increasing ownership to 300,000 shares

January 1, 2006 700,000 Shares @ 15 per share, resulting in 100% ownership of Bailey Company.

Simpson assumed significant influence over Baileys management in 2005. Ignore income tax effects and the opportunity costs of making investment in Bailey for the requirements listed here.

Required:

a. Compute the effect of these investment on Simpsons sales, Net income, and cash flows for each of the years 2004 and 2005.

b. Compute the carrying (book) value of Simpsons investment in Bailey as December 31, 2004 and December 31,2005.

c. Identify the U.S GAAP-based accounting method Simpson would use to account for its intercorporate investment in Bailey for 2006. Give two reason this accounting method/ Should be used.