To: [Manager's Name] From: [Your Name] Date: [Current Date] Subject: Accounting Treatment for Investment in Company K Overview: Company F has acquired 40% of the outstanding stock of Company K as of June 30, 20XX. Given the significant influence that this level of ownership typically represents, it is important to determine the appropriate accounting method for recording this investment on Company F's financial statements as of December 31, 20XX. Accounting Guidance: Based on the provided information, Company F should use the equity method to account for its investment in Company K. Here's the rationale and the steps for applying this method: Equity Method of Accounting Rationale: Significant Influence: Ownership of 20% to 50% of a company's voting stock generally indicates significant influence over the investee, thus necessitating the use of the equity method. Since Company F owns 40% of Company K's stock, it is presumed that Company F has significant influence over Company K's operations and financial policies. Income Recognition: Under the equity method, Company F will recognize its share of Company K's net income, rather than only recognizing dividends received as income. Balance Sheet Reporting: Initial Recognition: The investment should initially be recorded at cost on June 30, 20XX