Question

On January 1, 2013, Plano Company acquired 8 percent (28,000 shares) of the outstanding voting shares of the Sumter Company for $476,000, an amount equal to Sumter’s underlying book and fair value. Sumter declares and pays a cash dividend to its stockholders each year of $175,000 on September 15. Sumter reported net income of $350,000 in 2013, $421,200 in 2014, $469,400 in 2015, and $445,300 in 2016. Each income figure can be assumed to have been earned evenly throughout its respective year. In addition, the fair value of these 28,000 shares was indeterminate, and therefore the investment account remained at cost.

On January 1, 2015, Plano purchased an additional 32 percent (112,000 shares) of Sumter for $2,245,750 in cash and began to use the equity method. This price represented a $60,000 payment in excess of the book value of Sumter’s underlying net assets. Plano was willing to make this extra payment because of a recently developed patent held by Sumter with a 15-year remaining life. All other assets were considered appropriately valued on Sumter’s books.

On July 1, 2016, Plano sold 10 percent (35,000 shares) of Sumter’s outstanding shares for $980,000 in cash. Although it sold this interest, Plano maintained the ability to significantly influence Sumter’s decision-making process. Assume that Plano uses a weighted average costing system.

Answer 1

Total number of share held by Plano (28000+112000) = 140000 shares (40% share in sumter ,i.e. 8%+32% share)

Thus, sumter's total number of shares = 350000 shares (140000/40%)

If Plano sells 35000 shares, then

Total number of shares in sumter after sale = 315000 shares

Number of shares held by Plano = 105000, that makes 33.33% holding in Sumter.

If an investor holds at least 20 percent of the voting power of an investee, the investor is presumed to have significant influence.