On January 1, 2018, Acme Co. is considering purchasing a 40 percent ownership interest in PHC Co., a privately held enterprise, for $700,000. PHC predicts its profit will be $185,000 in 2018, projects a 10 percent annual increase in profits in each of the next four years, and expects to pay a steady annual dividend of $30,000 for the foreseeable future. Because PHC has on its books a patent that is undervalued by $375,000, Acme realizes that it will have an additional amortization expense of $15,000 per year over the next 10 yearsthe patents estimated remaining useful life. All of PHCs other assets and liabilities have book values that approximate market values. Acme uses the equity method for its investment in PHC.

Instructions:

Write a professional business memo addressed to the instructor that includes the details above and an Excel spreadsheet. The spreadsheet should set the following values in cells:

Acmes cost of investment in PHC.

Percentage acquired.

First-year PHC reported income.

Projected growth rate in income.

PHC annual dividends.

Annual excess patent amortization.

Referring to the values above, prepare the following schedules using columns for the years 2018 through 2022.

Acmes equity in PHC earnings with rows showing these:

Acmes share of PHC reported income.

Amortization expense.

Acmes equity in PHC earnings. Acmes Investment in PHC balance with rows showing the following:

Beginning balance.

Equity earnings.

Dividends.

Ending balance.

Return on beginning investment balance = Equity earnings/Beginning investment balance in each year.

Answer the following questions:

1. A company acquires a rather large investment in another corporation. What criteria determine whether the investor should apply the equity method of accounting to this investment?

2. What indicates an investors ability to significantly influence the decision-making process of an investee?