that C&G Corporation acquires a 40% interest in an affiliate for $500 and
accounts for this investment using the equitymethod. 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 statementfor 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?
