Burry Corporation acquires 80% of Bowman Company for $40 million on January 1, Year 6. At the time of acquisition, Bowman has total net assets with a fair value of $25 million. For the years ended December 31, Year 6, and December 31, Year 7, Bowman reports net income (loss) and pays dividends as shown here:
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Net Income (loss)
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Dividends Paid
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Net Income (loss)
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Dividends Paid
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Year 6
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$2,000,000
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$1,000,000
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$(600,000)
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$800,000
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The excess of the acquisition price over the fair value of net assets acquired is assigned to goodwill. Since goodwill has an indefinite life, it is not amortized.
Required:
a. Compute the value of Burry"s investment in Bowman Co. as of December 31, Year 7, under the equity method.
b. Discuss the strengths and weaknesses of the income statement and balance sheet in reflecting the economic substance of this transaction and subsequent business activities using the equity method.