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)

Year ending 31 December

2008

2009

Revenue

1,400

1,575

operating income

126

142

Net income

62

69

Total assets

1,170

1,317

Shareholders” equity

616

685

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

Year ending 31 December

2008

2009

Revenue

1,000

1,100

operating income

80

88

Net income

40

44

Dividend paid

20

22

Total assets

800

836

Shareholders” equity

440

462

On 31 December 2009, Cinnamon’s reported debt-to-equity ratio will most likely be highest if it is deemed to have

a. control of Cambridge.

b. joint control of Cambridge.

c. significant influence over Cambridge.