Reference no: EM132452967
Investing Activities Analysis Exercises and Problems
Question 1:
Below are two unrelated cases involving marketable equity securities. Explain how the information provided affects the classification, carrying value, and income reported for that company's investment securities.
1. The balance sheet of a company does not classify assets and liabilities as current and noncurrent. The portfolio of available-for-sale equity securities includes securities normally considered current that have a net cost in excess of market value of $2,000. The remainder of the portfolio has a net market value in excess of cost of $5,000.
2. A company's noncurrent portfolio of marketable equity securities consists of the common stock of one company. At the end of the prior year, the market value of the security was 50% of original cost, and this effect was properly reflected in a Valuation Adjustment account. However, at the end of the current year, the market value of the security had appreciated to twice the original cost. The security is still considered noncurrent at year-end.
Question 2:
IBM acquires 80% of ABC, Inc. for $40 million on January 1, 2013. At the time of acquisition, ABC has total net assets with a fair value of $25 million. For the years ending December 31, 2013, and December 31, 2014, ABC, Inc. reports net income (loss) and pays dividends as shown here:
Net Income (loss) Dividends Paid Net Income (loss) Dividends Paid
$2,000,000 $1,000,000 (2014) $(600,000) $800,000 (2013)
The excess of the acquisition price over the fair value of net assets acquired is assigned to goodwill. Since goodwill has an indefinite life, it is not amortized.
Required:
- Compute the value of IBM's investment in ABC, Inc. as of December 31, 2014, under the equity method.
- Discuss the strengths and weaknesses of the income statement and balance sheet in reflecting the economic substance of this transaction and subsequent business activities using the equity method.