The Wellness Society,a not-for-profit organization,owns 25% of the shares of the Fitness Factory,a for-profit organization.Three of the ten-person board of directors of the Fitness Factory are also directors of the Wellness Society.How should the Wellness Society account for its investment in the Fitness Factory?

Question

Quizplus · Accepted Answer

The equity method is appropriate in this scenario where the Wellness Society owns 25% of the shares of the Fitness Factory and has significant influence over its operations through its board members. The equity method involves recognizing the share of the profits or losses of the Fitness Factory in proportion to the Wellness Society's ownership interest. Consolidation is not applicable as the Wellness Society does not have control over the Fitness Factory. The cost method involves recognizing only the initial investment at cost without any adjustments for subsequent changes in the value of the investment, which is not relevant for this scenario. Note disclosure only is not appropriate as the share of ownership and influence on the board is significant enough to require recognition in the financial statements.

The Wellness Society,a Not-For-Profit Organization,owns 25% of the Shares of the Fitness