3. On January 2, 2013, Miller Properties paid $19 million for 1 million shares o

Question

3. 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?

Explanation / Answer

Details Amt /% Miller's share of Marlon= 16.67% Net Assets of Marlon                     66 Million Add FV increase of Patent                     24 Million Fair value of Marlon                     90 Million 16.67% of fair value=               15.00 Million Miller paid for 16.67% share of Marlon=                     19 Million Goodwill recognized                         4 Million Amortozation of FV uplift of patent in                     10 years Yearly amortization of Patent                 2.40 Million Millers share of Patent Amortization                 0.40 Million A When Miller does not have significant   influence , the same is treated as Available   for sale investment; Purchase Value of Investment                     19 Million Dec 31.2013.Year end Fair Value @$18.50 per share for 1 million shares held=               18.50 Million B When Miller has significant Influence over Marlon , the investment is treated in   Equity method Purchase Value of Investment                     19 Million Add 16.67% share of Marlon Profit in 2013                 2.00 Million Less : 16.67% share of dividend by Marlon               (1.00) Million Less: Share of Patent Amortization-Miller               (0.40) Million Investment Value Dec 31 2013.               19.60 Million

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