Question

On January 2, 2021, Miller Properties paid $28 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 2021.

The carrying amount of Marlon's net assets was $117 million. Miller estimated the fair value of those net assets to be the same except for a patent valued at $36 million above cost. The remaining amortization period for the patent is 10 years.
Marlon reported earnings of $54 million and paid dividends of $6 million during 2021. On December 31, 2021, Marlon's common stock was trading on the NYSE at $27.50 per share.
Required: 2. Assume Miller accounts for its investment in Marlon using the equity method. Ignoring income taxes, determine the amounts related to the investment to be reported in its 2021. (Do not round intermediate calculations. Enter all amounts as positive values. Enter your answers in millions rounded to 1 decimal places, (i.e., 5,500,000 should be entered as 5.5).):
a. Income statement million
b. Balance sheet million
c. Statement of cash flows
Operating cash flow million
Investing cash flow million

Answer 1

Using the equity method, Miller Properties would report $8.4 million as income from the investment on their income statement, $35.4 million as the investment value on their balance sheet, and $1 million as dividends received in the operating activities section of their statement of cash flows for 2021.

Step-by-step explanation:

When accounting for the investment in Marlon using the equity method, Miller Properties will recognize its share of Marlon's earnings, adjusted for any excess fair value of identified assets, and record dividends received. First, we calculate the income recognized from the investment:

• Investor's share of earnings = Total earnings × Ownership percentage
• Miller's share of Marlon's earnings: $54 million × (1 million shares ÷ 6 million shares) = $9 million
• Adjustment for patent amortization: $36 million ÷ 10 years × Ownership percentage = $0.6 million
• Adjusted Miller's share of earnings: $9 million - $0.6 million = $8.4 million

On the income statement, Miller would report an investment income of $8.4 million.

The initial balance sheet investment amount is the purchase price of $28 million. This will be adjusted by the investor's share of earnings and dividends received:

• Beginning balance of the investment = Purchase price
• Adjusted investment balance: $28 million + $8.4 million (earnings) - $1 million (dividends received) = $35.4 million

For the balance sheet, the investment in Marlon would be reported at $35.4 million.

Dividends received affect the statement of cash flows:

• Dividends received by Miller: $6 million × (1 million shares ÷ 6 million shares) = $1 million

In the statement of cash flows, under operating activities, Miller would report $1 million for dividends received, and there would be no investing cash flow related to the equity method investment since the purchase happened in the previous year.

Answer 2

A. Income statement $8.4 million

B. Balance sheet million $35.4 million

C. Operating cash flow million $1 million

Investing cash flow million=$28 million

Step-by-step explanation:

a. Calculation for Income statement million

Using this formula

Income statement=Investment revenue -Patent amortization adjustment

Let plug in the formula

Income statement= ($54 million × 1/6)-([$36 million] × 1/6]÷10 years)

Income statement=$ 9.0-$0.6

Income statement=$8.4 million

Therefore Income statement million will be $8.4 million

b. Preparation of the Balance sheet million

Cost $28 million

Add Investment revenue $9.0 million

($54 million × 1/6)

Less Dividend ($1 million)

($6 million × 1/6)

Less Patent amortization adjustment ($0.6 million)

([$36 million] × 1/6]÷10 years)

Balance sheet million $35.4 million

($28 million+$9.0 million-$1 million-$0.6 million)

Therefore Balance sheet million will be $35.4 million

c. Preparation of the Statement of cash flows

Operating cash flow million=($6 million × 1/6)

Operating cash flow million= $1 million

Investing cash flow million=$28 million

Therefore Operating cash flow million will be $1 million while the Investing cash flow million will be $28 million.