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.

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.