Problem
You are an intern in a CPA firm. Your manager walks into your cubicle and says, "One of our clients is thinking about investing in a company. He wants to know how he should account for this investment. Be prepared to discuss it with the client tomorrow."
Write a memo to your manager giving your thoughts on how this should be handled by the client. The situation is the following:
- Company F purchased 40% of the outstanding stock of company K on June 30, 20XX.
- Both of the companies have a December 31st, year end.
- Company K is a publicly traded company and reports its net income to company F.
- Company K also pays a hefty dividend to the shareholders of company F.
- How should company F report the above facts on its December 31, 20XX balance sheet and income statement?
- Support your answer.