Compute the value of IBM’s investment in ABC, Inc. as of December 31, 2014, under the equity method.

Question #1:

Below are two unrelated cases involving marketable equity securities. Explain how the information provided affects the classification, carrying value, and income reported for that company’s investment securities.

1. The      balance sheet of a company does not classify assets and liabilities as      current and noncurrent. The portfolio of available-for-sale equity      securities includes securities normally considered current that have a net      cost in excess of market value of $2,000. The remainder of the portfolio has      a net market value in excess of cost of $5,000.
2. A      company’s noncurrent portfolio of marketable equity securities consists of      the common stock of one company. At the end of the prior year, the market      value of the security was 50% of original cost, and this effect was      properly reflected in a Valuation Adjustment account. However, at the end      of the current year, the market value of the security had appreciated to      twice the original cost. The security is still considered noncurrent at      year-end.

Question #2:

IBM acquires 80% of ABC, Inc. for $40 million on January 1, 2013. At the time of acquisition, ABC has total net assets with a fair value of $25 million. For the years ending December 31, 2013, and December 31, 2014, ABC, Inc. reports net income (loss) and pays dividends as shown here:

Net Income (loss)

Dividends Paid

Net Income (loss)

Dividends Paid

$2,000,000

$1,000,000 (2014)

$(600,000)

$800,000 (2013)

The excess of the acquisition price over the fair value of net assets acquired is assigned to goodwill.  Since goodwill has an indefinite life, it is not amortized.

Required:

1. Compute      the value of IBM’s investment in ABC, Inc. as of December 31, 2014, under      the equity method.
2. Discuss      the strengths and weaknesses of the income statement and balance sheet in      reflecting the economic substance of this transaction and subsequent business      activities using the equity method.

Your submission should:

• Be full      2 pages for the written portion not including reference page, which you      must include.
• Include      separate page for reference 
• Include      the Excel spreadsheet with computations.
• Clearly      separate your responses so your instructor knows the problems you are      answering.
• Follow      the APA format only.

Chapters 4 & 5 in Financial Statement Analysis

Harris, P., & Harris, A. (2017). The positive outlook of the last in first out inventory methods. Journal of Business & Economic Research, 15(1), 1-4.

Rashty, J. (2018). The new guidance for goodwill impairment. CPA Journal, 88(9), 48-51.

Levy, H. (2016). Depreciable asset lives. CPA Journal, 86(9), 6-9. (To view this reading, please open the link provided and download the “PDF full text.”)

Financial Accounting Standards Board. (2006). Statement of financial accounting standards No. 157: Fair value measurements. Retrieved from https://www.fasb.org/summary/stsum157.shtml

Financial Accounting Standards Board. (2007). Statement of financial accounting standards No. 159: The fair value options of financial assets and financial liabilities including an amendment of FASB statement No. 115. Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820919488&blobheader=application%2Fpdf

Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). New York, NY: McGraw Hill. ISBN13: 9780078110962