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P8-8 A summary of the December 31, 2013 balance sheet of Masonite Tires follows:
Shareholders' equity 90,000
Total $160,000 Total $160,000
On January 1, 2014, Masonite purchased 2,000 (20 percent of the outstanding common shares) shares of Bingo Boots for $40,000 and held the investment throughout 2014 and 2015. During 2014 and 2015, Bingo earned a net income of $15,000 and $20,000, respectively. Bingo paid total dividends of $10,000 and $15,000 during 2014 and 2015. The per-share prices of Bingo common stock as of the end of 2014 and 2015 were $18 and $21, respectively. During 2014 and 2015, Masonite generated revenues (excluding revenues related to the investment in Bingo) of $85,000 and $75,000, respectively, and incurred expenses of $50,000 and $70,000, respectively. Assume that all these revenues and expenses involve cash. Masonite pays no dividends.
REQUIRED:
a. Assume that Masonite exercises its option to use the mark-to-market method.
(1) Prepare a balance sheet as of January 1, 2014.
(2) Prepare a balance sheet as of December 31, 2014, and an income statement for the year ended December 31, 2014.
(3) Prepare a balance sheet as of December 31, 2015, and an income statement for the year ended December 31, 2015.
b. Assume that Masonite uses the equity method.
(1) Prepare a balance sheet as of January 1, 2014.
(2) Prepare a balance sheet as of December 31, 2014, and an income statement for the year ended December 31, 2014.
(3) Prepare a balance sheet as of December 31, 2015, and an income statement for the year ended December 31, 2015.
c. Identify some reasons why the management of Masonite may wish to use the mark-to-market method instead of the equity method. Describe why the equity method might be preferred. Does holding 20 percent of a company's outstanding common stock necessarily mean that the investor company can exert substantial influence over the investee?
