Question

Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct? a) Barber may choose to apply the fair value option. b) Barber must consolidate Carter Company. c) Barber must utilize the equity method. d) Barber has no reporting obligations for the investment.

Answer 1

When Barber Company acquires 35% of the outstanding shares of Carter Company, it does not necessarily mean that b) Barber has to consolidate Carter Company.

Step-by-step explanation:

When Barber Company acquires 35% of the outstanding shares of Carter Company, it does not necessarily mean that Barber has to consolidate Carter Company. The decision to apply the fair value option or utilize the equity method depends on the level of control Barber has over Carter Company.

If Barber has significant influence over Carter Company, it must utilize the equity method. This involves recognizing the investment at cost and adjusting it based on the investor's share of the investee's earnings or losses. If Barber has control over Carter Company, it must consolidate the financial statements of both companies. This means combining the assets, liabilities, revenues, and expenses of both companies.