Massie Corporation has an investment in the common stock of Witzmann Corporation. Massie acquired its investment at Witzmann’s book value, so there was no excess cost associated with the investment.
In 20X1, Witzmann reported $50 million of net income and declared and paid $10 million in common dividends. Excluding any income arising from its investment in Witzmann, Massie reported net income in 20X1 of $200 million. Massie owns no stock in any companies other than Witzmann.
Ignore income taxes.
Required:
1. For each of four independent scenarios, determine the amounts Massie would report in its 20X1 external financial statements, in accordance with U.S. GAAP, for net income and net income attributable to Massie shareholders. Assume Massie and Witzmann have no intercompany sales.
a. Massie owns 30% of Witzmann and applies the equity method.
b. Massie owns 30% of Witzmann and elects to use the fair value option. (At December 31, 20X0, Witzmann had a market cap [i.e., fair value of all 100% of its common stock] of $900 million. At December 31, 20X1, Witzmann had a market cap of $960 million.)
c. Massie owns 90% of Witzmann and consolidates its investment.
d. Massie owns 100% of Witzmann and consolidates its investment.
2. Consider now the scenario where Massie owns 90% of Witzmann and consolidates its investment in Witzmann. However, add the following facts to the original problem statement:
a. Massie had sales of $2.7 billion (i.e., $2,700 million) in 20X1, none of which were made to Witzmann.
b. Witzmann had sales of $650 million in 20X1, of which $120 million were made to Massie.
What amount should Massie report in its 20X1 consolidated financial statements for sales revenue?
