Understanding Barber Company's Acquisition of Carter Company Shares

Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct?

Final answer: When Barber Company acquires 35% of the outstanding shares of Carter Company, it does not necessarily mean that Barber has to consolidate Carter Company.

The Importance of Control in Accounting for Investments

When Barber Company acquires a significant portion of another company, such as 35% of Carter Company's outstanding shares, it raises important questions about how to account for that investment in its financial statements. In this case, the decision to apply the fair value option, utilize the equity method, or consolidate the company depends on the level of control Barber has over Carter Company.

Equity Method vs. Fair Value Option

When a company has significant influence over another company but does not have control, it typically uses the equity method to account for the investment. This method involves recognizing the investment at cost and adjusting it based on the investor's share of the investee's earnings or losses. In this scenario, Barber Company would use the equity method if it has significant influence over Carter Company.

Consolidation of Financial Statements

If Barber Company has control over Carter Company, meaning it has the power to direct the activities of Carter Company to generate returns, it must consolidate the financial statements of both companies. This involves combining the assets, liabilities, revenues, and expenses of both companies into a single set of financial statements.

Therefore, the correct answer to the question posed is that Barber has reporting obligations based on the level of control it has over Carter Company. If it has significant influence, it must utilize the equity method. If it has control, it must consolidate the financial statements, but it doesn't automatically have to consolidate just because it acquired 35% of the shares.