Problem:
On July 1, 2007, Grape Crushers Company purchased for cash 40% of the outstanding capital stock of Fuzzy Flask Corporation. Both Grape Crushers and Fuzzy Flask have a December 31 year-end. Fuzzy Flask Corporation, whose common stock is actively traded on the American Stock Exchange, paid a cash dividend on November 15, 2007, to Grape Crushers Company and its other stockholders. It also reported its total net income for the year of $920,000 to Grape Crushers Company.
Prepare a one-page email of instructions on how Grape Crushers Company should report the above facts in its December 31, 2007, balance sheet and its 2003 income statement. In your e-mail, identify and describe the method of valuation you recommend. Provide rationale where you can. Address your e-mail to the chief accountant at Grape Crushers Company.