Please review the attached questions and help provide simple answers.
1. Assume that C&G Corporation acquires a 40% interest in an affiliate for $500 and accounts for this investment using the equity method. The affiliate reports the following summary balance sheet on the date of the acquisition:
Total Liabilities $ 8,750
Stockholders' Equity 1,250
Total assets $10,000 Total liabilities and equity $10,000
During the year, the affiliate reports net income of $300 and pays dividends to its shareholders of $100. At year-end, the investment in the affiliate has a market value of $800.
a. At what dollar amount will the investment be reported on C&G's balance sheet?
b. What amount of income will C&G report relating to this investment?
c. Briefly describe two statement analysis issues with respect to equity method investments.
d. Many equity method investments were caught up in the Fin 46R standard.
i. Briefly describe the requirements of Fin 46R.
ii. Briefly describe how many companies are now getting around the requirements of FIN 46R.
2. The new stock option accounting standard (SFAS 123R) requires recognition of stock option expense in the income statement for stock options issued after June 2005. Since most pre-existing stock options were accounted for under APB 25 (no compensation expense reported so long as exercise price set equal to market price on date of grant), briefly explain how can an analyst determine the expense relating to these preexisting options?
The response presents a clear narrative in answer to the questions together with calculations as needed.