Problem
Miller Properties - Equity method
On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon Company's 6 million outstanding common shares. Miller's CEO became a member of Marlon's board of directors during the first quarter of 2011.
The carrying amount of Marlon's net assets was $66 million. Miller estimated the fair value of those net as- sets to be the same except for a patent valued at $24 million above cost. The remaining amortization period for the patent is 10 years.
Marlon reported earnings of $12 million and paid dividends of $6 million during 2011. On December 31, 2011, Marlon's common stock was trading on the NYSE at $18.50 per share.
Task:
• When considering whether to account for its investment in Marlon under the equity method, what criteria should Miller's management apply?
• Assume Miller accounts for its investment in Marlon using the equity method. Ignoring income taxes, deter- mine the amounts related to the investment to be reported in its 2011:
o Income statement.
o Balance sheet.
o Statement of cash flows.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.