The equity method of accounting is used when the parent has significant influence over the investee but does not exercise control. The acquistion method is required when the parent controls, directly or indirectly, more than 50% of the voting stock.
Once Flitenight exercised its option to purchase the additional 40% of Rocky Mountain’s stock (for total ownership of 60%) on December 31, 2004, it could no longer use the equity method and had to switch to the acquistion method. In the acquistion method, Flitenight’s investment in Rocky Mountain is no longer listed as a separate asset on the balance sheet (all of Rocky Mountain’s assets and liabilities are combined with Flitenight’s, with the minority interest shown as equity), so Basten’s statement is incorrect. In the acquistion method, parent company cash flows exclude those between parent and investee, so Glenn’s statement is also incorrect
