Answer:
(a) See part a of the attached excel file.
(b) See part b of the attached excel file
Explanation:
(a) Assume that the stock acquired by Ball represents 15% of Leftwich's voting stock and that Ball has no influence over Leftwich's business decisions.
Note: See part a of the attached excel file for the Financial Statement Effects.
Under each transaction, the following calculations are made:
Transaction 1: Amount = Number of shares * Price per share = 10,000 * $17 = $170,000
Transaction 2: No calculation is needed as Ball has no influence over Leftwich's business decisions.
Transaction 3: Amount = Number of shares * Dividend per share = 10,000 * $1.20 = $12,000
Transaction 4: Amount = Number of shares * (Year-end market price per share - Acquisition price per share) = 10,000 * ($19 - $17) = $20,000
(b) Assume that the stock acquired by Ball represents 30% of Leftwich's voting stock and that Ball accounts for this investment using the equity method since it is able to exert significant influence.
Note: See part b of the attached excel file for the Financial Statement Effects.
Under each transaction, the following calculations are made:
Transaction 1: Amount = Number of shares * Price per share = 10,000 * $17 = $170,000
Transaction 2: Percentage of voting stock * Annual net income reported by Leftwich = 30% * $80,000 = $24,000
Transaction 3: Amount = Number of shares * Dividend per share = 10,000 * $1.20 = $12,000
Transaction 4: Amount = No calculation is needed as Ball has influence over Leftwich's business decisions.
