P 12 13 Miller Properties Equity method LO5 LO6 On January 2 2011 Miller Properties paid 19 million for 1 million shares of Marlon Company s 6 million outstanding 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 amortization period 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 13 Requirement 1 Miller s management should decide whether it has the ability to exercise significant influence over operating and financial policies of the Marlon Company Ability to exercise significant influence is presumed for investments of 20 percent or more of voting stock and presumed not to exist for investments of less than 20 percent 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 2 Income statement a millions Investment revenue 12 million x 1 6 Patent amortization adjustment 4 million 10 24 million x 1 6 b Balance sheet Investment in Marlon Company 19 million 2 million 1 million 0 4 million in 2 0 4 1 6 19 6 Investment in Marlon Company in millions Cost Share of income 19 0 2 0 1 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 as investment revenue in net income to the 1 of cash actually received in dividends and needing to be shown in cash from operations