Williams Corporation and Jones Company established a joint venture to manufacture components for both companies on January 1, 20X1, and have operated it quite successfully for the past four years. Williams and Jones both contributed 50% of the equity when the joint venture was created. Willams purchases approximately 70% of the output of the joint venture and Jones purchases 30%. Willams and Jones have equal numbers of members on the board of directors of the joint venture and participate equally in the management of the joint venture. Joint venture profits are distributed at year-end on the basis of total purchases by each company.
Willams has been using the equity method to report its investment in the joint venture. However, Willams's financial vice president believes that each company should use pro-rata consolidation.
As the Controller, you have been asked to prepare a memo discussing those situations in which pro-rata consolidation may be appropriate and to offer your recommendation as to whether Williams should continue to use the equity method or switch to pro-rata consolidation.