ACC 306 Week 1 DQ1 Equity Method

P 1213 - Miller Properties - Equity method ? LO5 LO6

On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Companys 6 million outstanding common shares. Millers CEO became a member of Marlons board of directors during the first quarter of 2011.

The carrying amount of Marlons 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, Marlons 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 Millers management apply?

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.

b. Balance sheet.

c. Statement of cash flows.