Acme Company acquired 4,000 shares of Orange Company on January 1, Year 11, for $400,000. These 4,000 shares represent 8% of Orange shares outstanding. The fair market value of Orange shares on that date was $100 per share. Orange declared and paid dividends in late Year 11 in the amount of $20,000. Orange reported income in Year 11 of $200,000. At the end of Year 11, the fair market value of Orange shares was $110 per share. Acme does not intend to actively trade the Orange shares.
1. In Year 12, Orange Company’s income was $160,000. In Year 12 Orange declared and paid $240,000 in cash dividends. At the end of Year 12, the fair market value of Orange shares was $122 per share.
2. On January 1, Year 13, Acme is considering acquiring an additional 11,000 Orange shares at $122 per share, their fair market value on that date. These additional shares would give Acme significant influence over Orange.
3. Orange had 50,000 shares issued and outstanding throughout Years 11-13 inclusive. Assume the books for Year 12 are closed at the time of your proposed adjustments [if any] to Acme’s accounting records. Ignore tax effects throughout this series of events.
Prepare your recommended adjustment to the financial statements of Acme as of January 1, Year 13, assuming the accounting records of Acme through the end of Year 12 are closed by January 1, Year 13. Also show the adjusted financial statement balances on December 31, Year 12, for all accounts impacted by these events. Conclude by offering a recommendation to Acme management based only on these financial statement implications. [Limit these financial statement implications to the balance sheet and the income statement.]