Question

Wellness society, a not-for-profit organization, has a 35% economic interest in the walk for canada, another not-for-profit organization. the organizations operate independently, have no directors in common, and have no transactions with each other. for financial reporting purposes, how should wellness society account for its interest in the walk for canada?

a. none of the other options are correct.
b. consolidation
c. note disclosure only
d. the equity method
e. the cost method

Answer 1

For financial reporting purposes, The Wellness Society should account for its interest in Walk for Canada with Note Disclosure Only, as they operate independently without shared control or significant transactions (c).

Step-by-step explanation:

The Wellness Society should account for its 35% economic interest in the Walk for Canada organization using Note Disclosure Only. Given that the Wellness Society and the Walk for Canada operate independently, do not have common board members, and do not engage in transactions with one another, they would not consolidate their financial statements. The equity method is typically used when the investor has significant influence over the investee, which is generally presumed with ownership of more than 20% of the voting shares, unless it can be clearly demonstrated that this is not the case.

However, the absence of common directors and transactions, paired with the operation of the organizations as independent entities, suggests that the equity method would also not be appropriate. Therefore, the cost method is not used, and consolidation is not appropriate due to the lack of control over the other entity. Instead, the relationship should simply be acknowledged via note disclosure in the financial statements of the Wellness Society.