Cinnamon, Inc. is a diversified manufacturing company headquartered in the United States, and it complies with U.S. GAAP. In 2008, Cinnamon held a 19 percent passive stake in Cambridge Processing that was classified as available for sale. During the year, the value of this stake rose by $2 million. In December 2008, Cinnamon announced that it would be increasing its ownership to 50 percent effective 1 January 2009.

Peter Lubbock, an analyst following both Cinnamon and Cambridge, is curious how the increased stake will affect Cinnamon’s consolidated financial statements. He asks Cinnamon’s chief financial officer how the company will account for the stake, and is told that the decision has not yet been made. Lubbock decides to use his existing forecasts for both companies’ financial statements to compare various alternative outcomes.

Lubbock gathers abbreviated financial statement data for Cinnamon (Exhibit 15-7) and Cambridge (Exhibit 15-8) for this purpose.

EXHIBIT 15-7 Selected Financial Statement Estimates for Cinnamon, Inc. ($ millions)

EXHIBIT 15-8 Selected Financial Statement Estimates for Cambridge Processing ($ millions)

On 31 December 2009, Cinnamon’s shareholders equity amount on the balance sheet would most likely be

a. highest if Cinnamon is deemed to have control of Cambridge.

b. independent of the accounting method used for the investment in Cambridge.

c. highest if Cinnamon is deemed to have significant influence over Cambridge.