The following data are taken from the December 31 annual report of Bailey Company: ($ in thousands) Sales... Net income. Dividends paid January 1, 2004 January 1, 2005 January 1, 2006 2004 $50,000 2,000 1,000 2005 $60,000 2,200 1,200 2006 $70,000 2,500 1,500 Bailey had 1,000,000 common shares outstanding during this entire period and there is no public market for Bailey Company shares. Also during this period, Simpson Corp. bought Bailey shares for cash, as follows: 10,000 shares at $10 per share 290,000 shares at $11 per share, increasing ownership to 300,000 shares 700,000 shares at $15 per share, resulting in 100% ownership of Bailey Company Simpson assumed significant influence over Bailey's management in 2005. Ignore income tax effects and the opportunity costs of making investments in Bailey for the requirements listed here. PROBLEM 5-3 Analyzing Investment Securities Transactions
The following data are taken from the December 31 annual report of Bailey Company: ($ in thousands) Sales... Net income. Dividends paid January 1, 2004 January 1, 2005 January 1, 2006 2004 $50,000 2,000 1,000 2005 $60,000 2,200 1,200 2006 $70,000 2,500 1,500 Bailey had 1,000,000 common shares outstanding during this entire period and there is no public market for Bailey Company shares. Also during this period, Simpson Corp. bought Bailey shares for cash, as follows: 10,000 shares at $10 per share 290,000 shares at $11 per share, increasing ownership to 300,000 shares 700,000 shares at $15 per share, resulting in 100% ownership of Bailey Company Simpson assumed significant influence over Bailey's management in 2005. Ignore income tax effects and the opportunity costs of making investments in Bailey for the requirements listed here. PROBLEM 5-3 Analyzing Investment Securities Transactions
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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SEE SCREENSHOT ATTACHED Required:
a) Compute the effects of these investments on Simpson’s reported sales, net income, and cashflows for each of the years 2004 and 2005.
b) Compute the carrying (book) value of Simpson’s investment in Bailey as of December 31, 2004, and December 31, 2005.
Identify the U.S. GAAP-based accounting method Simpson would use to account for its inter corporate investment in Bailey for 2006. Give two reasons this accounting method must/should be used.
for reference check b) book value, 12/31/2005, $3,600,000
Transcribed Image Text:The following data are taken from the December 31 annual report of Bailey Company:
($ in thousands)
Sales...
Net income..
January 1, 2004
January 1, 2005
January 1, 2006
2004
$50,000
2,000
Dividends paid .... 1,000
2005
$60,000
2,200
1,200
2006
$70,000
2,500
1,500
Bailey had 1,000,000 common shares outstanding during this entire period and there is no public
market for Bailey Company shares. Also during this period, Simpson Corp. bought Bailey shares
for cash, as follows:
10,000 shares at $10 per share
290,000 shares at $11 per share, increasing ownership to 300,000 shares
700,000 shares at $15 per share, resulting in 100% ownership of Bailey Company
Simpson assumed significant influence over Bailey's management in 2005. Ignore income tax
effects and the opportunity costs of making investments in Bailey for the requirements listed
here.
PROBLEM 5-3
Analyzing Investment
Securities Transactions
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