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Week 1 Discussion 1 - The criteria that Millers Mngt Should...

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P12-13 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?
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Unformatted text preview: The criteria that Millers Mngt. Should apply is that it recognizes investment income as a percentage which is 1,000,000/6,000,000 = 1/6 = .17 = 17% 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. 12,000,000 X 17% = $2,040,000 Investment Revenue = $2,040,000 b. Balance sheet Net Asset = 66,000,000 66,000,000 24,000,000 = 42,000,000 42,000,000 1,020,000 (dividends) = 40,980,000 Net Assets c. Statement of cash flows. Out flow of $19,000,000 for purchase Inflow of dividends calculated at 6,000,000 x 17% = $1,020,000...
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