Abraham, Inc., a New Jersey corporation, operates 57 bakeries throughout the northeastern section of the United States. In the past, its founder, James
Abraham, owned all the company’s entire outstanding common stock. However, during the early part of this year, the corporation suffered a severe cash flow
problem brought on by rapid expansion. To avoid bankruptcy, Abraham sought additional investment capital from a friend, Dennis Bostitch, who owns Highland
Laboratories. Subsequently, Highland paid $700,000 cash to Abraham, Inc., to acquire enough newly issued shares of common stock for a one-third ownership
interest. At the end of this year, the accountants for Highland Laboratories are discussing the proper method of reporting this investment. Once argues for
maintaining the asset at its original cost: Af?cAc‚¬A??oThis purchase is no more than a loan to bail out the bakeries. Mr. Abraham will continue to run the organization
with little or no attention paid to us. After all, what does anyone in our company know about baking bread? I would be surprised if Abraham does not reacquire
these shares as soon as the bakery business is profitable again.Af?cAc‚¬ One of the other accountants disagrees, stating that the equity method is appropriate. Af?cAc‚¬A??oI
realize that our company is not capable of running a bakery. However, the official rules state that we must have only the ability to exert significant
influence. With one-third of the common stock in our possession, we certainly have that ability. Whether we use it or not, this ability means that we are
required to apply the equity method.Af?cAc‚¬<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />