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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.

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Question #2:
IBM acquires 80% of ABC, Inc. for $40 million on January 1, 2013. At the time of acquisition, ABC has total net assets with a fair value of $25 million. For the years ending December 31, 2013, and December 31, 2014, ABC, Inc. reports net income (loss) and pays dividends as shown here:
Net Income (loss) Dividends Paid Net Income (loss) Dividends Paid
$2,000,000 $1,000,000 (2014) $(600,000) $800,000 (2013)
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:
Compute the value of IBM’s investment in ABC, Inc. as of December 31, 2014, under the equity method.
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.
Your submission should:
Be 1-2 pages for the written portion.
Include the Excel spreadsheet with computations.
Clearly separate your responses so your instructor knows the problems you are answering.

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