Question

Please provide me with the CORRECT SOLUTION to this problem. NOTE: it`s GRADED. Thank you.

On January 1, 2017 Donald Miller Corporation acquired 20,000 of the 50,000 shares. 40% of common stock of Bigboy company for $25 per share. Miller Corporation has Significant Influence over Bigboy company.

Additional Information:

1.Per Bigboy annual report for the year ending 12/31/2017 they reported net income of 120,000 and declared paid total cash dividends of 40,000.

2. Bigboy`s stock had a fair value of $24 per share on December 31, 2017.

A. Assuming that the above investment was properly accounted for under GAAP A. What was the balance in the investment account as of 12/31/2017? B.

B.What was the Impact on the income statement for the year ending 12/31/2017 for the above investment (State the amount and increase/ decrease)

Answer 1

As there is significant influence and the Miller acquired more than 40% of the share, there will be application of Equity Method of Accounting here.

A. What was the balance in the investment account as of 12/31/2017?

Thus, $ 500000 + $ 48000 - $ 40000 = $ 508000 would be the balance in investment a/c

B.What was the Impact on the income statement for the year ending 12/31/2017 for the above investment

Income will increase by $ 48000 of Miller Corp as share of profit earned by the investee

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