(Read attachment – for rubric and instructions)
Investing Activities Analysis Exercises and Problems
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 original content! Plagiarism must be avoided at all costs.
Do not use bullet point on the paper. It must contain an introduction with thesis, then the body, and a conclusion
Be 3 (4 if needed) pages for the written portion.
Include the Excel spreadsheet with computations.
Clearly separate your responses so your instructor knows the problems you are answering
ONLY use reliable sources – journals, peer reviewed articles, The New Your Times’ articles, etc. (NO Wikipedia or alike). I need to be able to verify all sources that were used.
Required Reading
Chapters 4 & 5 in Financial Statement Analysis
Subramanyam, K.R. (2014). Financial statement analysis (11th ed). McGraw Hills. ISBN13: 9780078110962
+++ free online access to 10th ed. https://madnanarshad.files.wordpress.com/2014/02/fsa-by-john-j-wild-10th-wdition.pdf
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.
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