The following data are from the annual report of Francisco Company, a specialized packaging manufacturer: Year 6 Year 7 Year 8 $25,000 $35,000 $30,000 2,200 1,200 Sales . Net income. 2,000 2,500 Dividends paid. . Book value per share (year-end)... 1,000 1,500 11 12 13 Note: Francisco had 1,000 common shares outstanding during the entire period. There is no public market for Francisco shares. Potter Company, a manufacturer of glassware, made the following acquisitions of Francisco com- mon shares: January 1, Year 6 January 1, Year 7 January 1, Year 8 10 shares at $10 per share 290 shares at $11 per share, increasing ownership to 300 shares 700 shares at $15 per share, yielding 100% ownership of Francisco Ignore income tax effects and the effect of lost income on funds used to make these investments. Required: a. Compute the effects of these investments on Potter Company's reported sales, net income, and cash flows for each of the Years 6 and 7. b. Calculate the carrying value of Potter Company's investment in Francisco as of December 31, Year 6, and December 31, Year 7. c. Discuss how Potter Company accounts for its investment in Francisco during Year 8. Describe any additional information necessary to calculate the impact of this acquisition on Potter Company's financial statements for Year 8.
The following data are from the annual report of Francisco Company, a specialized packaging manufacturer: Year 6 Year 7 Year 8 $25,000 $35,000 $30,000 2,200 1,200 Sales . Net income. 2,000 2,500 Dividends paid. . Book value per share (year-end)... 1,000 1,500 11 12 13 Note: Francisco had 1,000 common shares outstanding during the entire period. There is no public market for Francisco shares. Potter Company, a manufacturer of glassware, made the following acquisitions of Francisco com- mon shares: January 1, Year 6 January 1, Year 7 January 1, Year 8 10 shares at $10 per share 290 shares at $11 per share, increasing ownership to 300 shares 700 shares at $15 per share, yielding 100% ownership of Francisco Ignore income tax effects and the effect of lost income on funds used to make these investments. Required: a. Compute the effects of these investments on Potter Company's reported sales, net income, and cash flows for each of the Years 6 and 7. b. Calculate the carrying value of Potter Company's investment in Francisco as of December 31, Year 6, and December 31, Year 7. c. Discuss how Potter Company accounts for its investment in Francisco during Year 8. Describe any additional information necessary to calculate the impact of this acquisition on Potter Company's financial statements for Year 8.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:PROBLEM 5-5
The following data are from the annual report of Francisco Company, a specialized packaging
manufacturer:
Analyzing Financial
Statement Effects of
Intercorporate
Year 6
Year 7
Year 8
Investments
$25,000
$30,000
2,200
Sales..
$35,000
Net income.
2,000
2,500
Dividends paid. .
1,000
1,200
1,500
Book value per share (year-end)
11
12
13
Note: Francisco had 1,000 common shares outstanding during the entire period. There is no public market for Francisco
shares.
Potter Company, a manufacturer of glassware, made the following acquisitions of Francisco com-
mon shares:
January 1, Year 6
January 1, Year 7
January 1, Year 8
10 shares at $10 per share
290 shares at $11 per share, increasing ownership to 300 shares
700 shares at $15 per share, yielding 100% ownership of Francisco
Ignore income tax effects and the effect of lost income on funds used to make these investments.
Required:
a. Compute the effects of these investments on Potter Company's reported sales, net income, and cash flows for
each of the Years 6 and 7.
CHЕCK
(b) $3,600 at Dec. 31,
Year 7
b. Calculate the carrying value of Potter Company's investment in Francisco as of December 31, Year 6, and
December 31, Year 7.
c. Discuss how Potter Company accounts for its investment in Francisco during Year 8. Describe any additional
information necessary to calculate the impact of this acquisition on Potter Company's financial statements for
Year 8.
(CFA Adapted)
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