Question: On January 1, 2014, Newyork Capital Corporation purchased 30% of the outstanding common shares of Delta Crating Corp. for $250 million and accounts for this investment under the equity method. The following information is available regarding Delta Crating Corp.
Two-thirds of the difference between the book value and fair value of Delta's identifiable net assets at acquisition is attributable to depreciable assets having fair value greater than their book value and the remaining one-third is attributable to land having fair value in excess of its book value. The depreciable assets have an average remaining useful life of 10 years and are being depreciated by the straight-line method with zero residual value.
Required: 1. Provide the journal entries that Newyork Capital would make in 2014 and 2015 to account for its investment in Delta Crating under the equity method. Provide supporting details for all calculations needed.
2. Determine the carrying value of Newyork's Investment in Delta Crating account on December 31, 2014, and December 31, 2015, under the equity method.
3. Now assume that Newyork elected the fair value option for the equity method on the January 1, 2014, acquisition date. Repeat requirements 1 and 2.
4. Based on your answers, discuss the impact of the fair value option on Newyork's net profit margin in 2014 and 2015.