RECOMMENDED!!Since Boomer Company’s inception, Madison Company has owned 18 percent of Boomer’s outstanding

  

Using the Cost of Equity MethodSince Boomer Company’s inception, Madison Company has owned
18 percent of Boomer’s outstanding common stock. Madison provides three key
management personnel to Boomer and purchased 25 percent of Boomer’s output
during 20X7. Boomer is profitable. On January 2, 20X8, Madison purchased
additional common stock to finance Boomer’s expansion, thereby becoming a 30
percent owner. Boomer’s common stock does not have a quoted market price. The
stock has always been issued at its book value, which is assumed to approximate
its fair value.a. In general, distinguish between investor-income reporting
under the cost method and under the equity method. Which method is more
consistent with accrual accounting? Why?b. Prior to January 2, 20X8, what specific factors should
Madison have considered in determining the appropriate method of accounting for
its investment in Boomer?c. Assume that Madison used the cost method in accounting
for its investment in Boomer prior to January 2, 20X8. Describe the book
adjustments required on January 2, 20X8, when Madison became owner of 30 percent of Boomer’s outstanding common stock.