Fundamental Accounting Principles

At the beginning of 2003, Red Corporation purchased a long-term investment in Acme Corporation. The following information is available for the purchases:

% interest acquired 30%
# of shares purchased 300,000
Price/share $15.00
Amount paid $4,500,000

The following information is available for Acme for the years 2003-2007:

Year
Income
Dividends Share FMV
at End of Year
2003 $ 2,400,000 $1,500,000 $17.00
2004 $ 2,600,000 $1,600,000 $19.00
2005 $ 2,900,000 $1,800,000 $21.00
2006 $ 3,200,000 $2,000,000 $24.00
2007 $ 3,500,000 $2,200,000 $27.00
Totals $14,600,000 $9,100,000

On January 1, 2008, Red sold its investment in Acme for $27 per share.

Required:
a. How much income would Red report in the aggregate for the years 2003-2007? It is not necessary to show the income year by year.
b. How much income would Red report for 2008?
c. What was Red's net income from its investment in Acme over the whole life of the investment, from the purchase to the sale?
d. What was Red's net cash flow from its investment in Acme over the whole life of the investment, from the purchase to the sale?

a) Red would report 800,000 (30% X 2,400,000) of income in 2003. 780,000 (30% X 2,600,000 in 2004. 870,000 (30% X 2,900,000) in 2005. 960,000 (30% X 3,200,000) in 2006 and 1,050,000 (30% X 3,500,000) in 2007. Yes, it is necessary to show income year by year.
b) 1,050,000
c) Proceeds from sale = $27/share X 300,000 shares = 8,100,000
Add: Net Revenues over life of ownership 1,650,000
Minus: Purchase of shares: (4,500,000)
Gain (loss) 5,250,000
d) Net cash flow would also be 5,250,000

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!