The Wellness Society, a not-for-profit organization, owns 5% of the shares of the Fitness Factory, a for-profit organization. The two organizations operate independently and have no board members in common. How should the Wellness Society account for its investment in the Fitness Factory?

Question

Quizplus · Accepted Answer

The cost method is appropriate when the investor has insignificant influence over the investee, as is the case here with only a 5% stake and no board members in common. Under the cost method, the investment is initially recorded at cost and subsequently adjusted for any dividends received from the investee. Note disclosure may be necessary to provide information about the investment and its fair value, but consolidation and the equity method are not appropriate.

The Wellness Society, a Not-For-Profit Organization, Owns 5% of the Shares