On January 2, 2013, Miller Properties paid $19 million for 1 million shares of M
ID: 2462533 • Letter: O
Question
On January 2, 2013, 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 2013. The net book value of Marlon’s net assets was $66 million. Miller estimated that the fair value of those net assets was 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 2013. On December 31, 2013, Marlon’s common stock was trading on the NYSE at $18.50 per share. Miller Company has no intention of disposing of this stock in the near future.
REQUIRED:
a) Assume that Miller Properties does not exercise significant influence. What entries should Miller Company record in 2013 for its investment?
b) Assume that Miller Properties does exercise significant influence. What entries should Miller Company record in 2013 for its investment?
Thanks!
Explanation / Answer
A. Where Miller properties does not exercise significant influence
Investment should be recorded at cost price since the investment is considered long term (as there is no intention to dispose of stock in near future). So the investment should be recorded at $ 19 Million.
B. Where Miller properties exercises significant influence.
The investment should be shown at book value. The market price should be given only as a note and does not influence the value of investment in the balance sheet.
Book value
Net asset - $ 66 Million
Less: Overvalued patent - $ 24 Million
Add: Retained earning $ 6 Million
Net book value of asset - $ 48 Million
Total number of shares - 6 Million
value per share - $ 8
No. of shares held by Miller properties - 1 Million
Investment value at book value - 8 Million
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