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Company A and Company B entered into a joint venture to manufacture components used by...

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Accounting

Company A and Company B entered into a joint venture to manufacture components used by both companies. The JV has been quite successfully for a number of years. Company A & B both contributed 50 percent of the equity when the joint venture was created. Company A purchases roughly 70 percent of the output of the joint venture and Company B purchases 30 percent. Company A & B have equal representation on the JVs board of directors and participate equally in its management. JV profits are distributed at year-end based on total purchases by each company.

Required:

Company A has been using the equity method to report its investment in the joint venture; however,

As financial vice president believes that each company should use pro rata consolidation. As a senior accountant at Company A, you have been asked to discuss those situations in which pro rata consolidation may be appropriate.

What are your recommendost:ations for Company A to continue to use the equity method or switch to pro rata consolidation? Remember to include citations using independent and authoritative support for your discussion.

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