Problem 1 Mark to market accounting:
Consider the following information:
1. Giant Motors purchases 5% of Crane Tire Company's common stock for $30 million on January 1,2008.
2. Crane earned $25 million in net income for 2008.
3. Crane pays total dividends of $15 during 2008.
4. The market value of Giant's 5% investment in Crane is $25 million on December 31,2008.
1. Assume that Giant's management considers its investment in Crane as a trading security. At what amount should Giant report its investment in Crane in its 2008 balance sheet?
2. How would Giant's investment in Crane effect its 2008 income statement?
3. In contrast to requirement 1,assume that Giant's management considers its investment as an available-for-sale security. At what amount should Giant report its investment in Crane in its 2008 balance sheet?
4. Using the facts presented in requirement 3, determine how, if at all, Giant's investment in Crane would affect its 2008 income statement.
Problem 2: Reporting intercorporate investments- Equity Method.
Consider the following sequence of events:
- On January 1,2008, Big Time Motors purchased 25% of Cooper Tire Company's common stock for $150 million. The book value of Cooper's net assets on this date was $400 million.
- Cooper earned $25 million in net income for 2008.
- Cooper declared and paid total dividends of $15 million during 2008
- On January 1, 2009, Big Time purchased an additional 15% of Cooper common stock for $100 million.
- Cooper had a net loss of $40 million for 2009.
- Cooper paid total dividends of $18 million during 2009.
1. What amount of investment income should Big Time report on its 2008 income statement as a result of its investment in Cooper? At what amount would Big Time Motors report is investment in Cooper in its December 31,2008 balance sheet?
2. At what amount should Big Time report its investment in Cooper in its December 31, 2009 balance sheet?
This solution provides assistance with determining investments using the equity method.