UOPX ACC 306 - P 12–13 - Miller Properties
Course Acc 306-
Pages 2

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Problem 12-13P 12–13 - Miller Properties - Equity method ● LO5 LO6On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Company’s 6 millionoutstanding common shares. Miller’s CEO became a member of Marlon’s board of directors during the first quarter of 2011.The carrying amount of Marlon’s net assets was $66 million. Miller estimated the fair value of those net as- sets to be the same except for a patent valued at $24 million above cost. The remaining amortizationperiod for the patent is 10 years.Marlon reported earnings of $12 million and paid dividends of $6 million during 2011. On December 31, 2011, Marlon’s common stock was trading on the NYSE at $18.50 per share.Required:1. When considering whether to account for its investment in Marlon under the equity method, what criteria should Miller’s management apply?2. Assume Miller accounts for its investment in Marlon using the equity method. Ignoring income taxes, deter- mine the amounts related to the investment to be reported in its 2011: a. Income statement. b. Balance sheet.c. Statement of cash flows.Problem 12-13Requirement 1 Miller’s management should decide whether it has the ability to exercisesignificant influence over operating and financial policies of the Marlon Company.Ability to exercise significant influence is presumed for investments of 20 percentor more of voting stock and presumed not to exist for investments of less than 20percent, other things being equal. Evidence to the contrary should be considered,including participation on the board of directors, technological dependency,material intercompany transactions, or interchange of managerial personnel.Requirement 2a. Income statement: ($ in millions)Investment revenue ($12 million x 1/6) $2.0Patent amortization adjustment ($4 million* ÷ 10) ( .4) *([$24 million] x 1/6])$1 .6 b. Balance sheet:Investment in Marlon Company ($19 million + 2 million – 1 million – 0.4 million) $19 .6* *Investment in Marlon Company ($ in millions)Cost 19.0Share of income 2.01.0 Dividends ($6 million x 1/6).4 Amortization adjustment _________________Balance 19 .6 c. Statement of cash flows: $19 million cash outflow from investing activities $1 million cash inflow (dividends) among operating activities (Note: if Marlon uses the indirect method to report its operating cash flows,it would need an adjustment of ($0.6) to get from the $1.6 included asinvestment revenue in net income to the $1 of cash actually received individends and needing to be shown in cash from

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UOPX ACC 306 - P 12–13 - Miller Properties

Course: Acc 306-
Pages: 2
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