On July 1, 2014, Burrito Company purchased for cash 40% of the outstanding capit

Question

On July 1, 2014, Burrito Company purchased for cash 40% of the outstanding capital stock of Cheese Corporation. Both Burrito and Cheese have a December 31 year-end. Cheese Corporation, whose common stock is actively traded on the American Stock Exchange, paid a cash dividend on November 15, 2014, to Burrito Company and its other stockholders. It also reported its total net income for the year of $920,000 to Burrito Company.

Instructions:

Prepare a memorandum of instructions on how Burrito Company should report the above facts in its December 31, 2014, balance sheet and its 2014 income statement. In your memo, identify and describe the method of valuation you recommend. Provide rationale where you can. Address your memo to the chief accountant at Burrito Company.

Explanation / Answer

To                                                                                                                             December 31, 2014

The Chief Accountant

Burrito Company

Sub: Memorandum of Instruction

As Far As Balance sheet items is concerned, The given facts will be shown in balcnce sheet as on December 31,2014 as follows.

A) In Assets Side

Method of Valuation

Due to Price apreciation in the stock of cheese corporation, there my be some unrealized gain in the investment held.But it should not be booked due to notional nature of profit.

Regards

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