Business Accounting

Anonymous
timer Asked: Oct 22nd, 2018
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Question Description

The following information comes from the 2016 annual report of Eugene Corporation.

On May 2, 2016, Eugene sold its 41% equity interest in Chemult Industries Corporation to Chemult for $25 million and settled all of the pending arbitration proceedings, litigation and related disputes with Chemult and its officers and other owners, pursuant to a settlement and redemption agreement. Eugene had acquired the Chemult equity interest in 2007, when Eugene invested approximately $1.3 million in Chemult. The investment in Chemult was accounted for under the equity method and adjusted for earnings or losses as reported in the financial statements of Chemult and dividends received from Chemult. At December 31, 2015, our investment balance for Chemult was $17.2 million, and for the years ended December 31, 2016, 2015 and 2014, our equity in earnings was $5.2 million, $15.1 million and $11.6 million, respectively.


The following table summarizes Chemult’s financial information as of and for the year ended December 31 (in thousands):

January 1 through

May 2, 2016

January 1 through

December 31, 2015

Revenues

$146,597

$375,022

Gross margin

$ 18,118

$ 50,677

Net income

$ 12,712

$ 36,904

December 31,

2015

Current assets

$147,851

Noncurrent assets

3,367

Current liabilities

96,856

Noncurrent liabilities

12,411

Equity

$ 41,951


Required:

a.

Eugene used the equity method to account for its investment in Chemult. Briefly explain how this accounting method affects Eugene’s balance sheet and income statement.

b.

Use the income statement information for Chemult presented above, to calculate the equity earnings that Eugene reported on its 2015 income statement.

c.

Use the balance sheet information for Chemult presented above, to determine the investment balance for Chemult at December 31, 2015.

d.

If Chemult did not pay any dividends to Eugene during 2016, based on the above information and your answer to c., what would have been the balance in Eugene’s Investment in Chemult account just prior to the sale on May 2, 2016? Calculate the gain or loss on the sale.

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Dr_MurpheyPhD
School: Carnegie Mellon University

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