Question

Assessing Financial Statement Effects of Passive and Equity Method Investments On January 1, Ball Corporation purchased shares of Leftwich Company common stock.
(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. Use the financial statement effects template (with amounts and accounts) to record the following transactions:
(1) Ball purchased 10,000 common shares of Leftwich at $17 cash per share.
(2) Leftwich reported annual net income of $80,000.
(3) Ball received a cash dividend of $1.20 per common share from Leftwich.
(4) Year-end market price of Leftwich common stock is $19 per share. Use negative signs with your answers, when appropriate.
(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. Use the financial statement effects template (with amounts and accounts) to record the following transactions:
(1) Ball purchased 10,000 common shares of Leftwich at $17 cash per share.
(2) Leftwich reported annual net income of $80,000.
(3) Ball received a cash dividend of $1.20 per common share from Leftwich.
(4) Year-end market price of Leftwich common stock is $19 per share. Use negative signs with answers, when appropriate.

Answer 1

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.

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