Required Book By R. E. Christensen, T. E. Cottrell, D. M. 20

Required Bookbaker R E Christensen T E Cottrell D M 2012

Classifying Disney Properties. 1st Post Due by Day 3. Watch the “Disney Buys Star Wars” video and review the Walt Disney 2013 Annual Report.

In your post, answer the following: a. What did Disney get with the 4 billion acquisition and how does Forbes Staff, Dorothy Pomerantz, classify Star Wars as a property in the video? b. What percent of the following companies does the Walt Disney Company own and how does the Walt Disney Company account for the following investments? Lucas Film, Hulu, AETN, UTV, Seven TV. c. How much did the Walt Disney Company increase the investment account during the year due to recognizing investee income? (Cash flow statement) d. How much did the Walt Disney Company decrease the investment account during the year due to receiving dividends from equity investments? (Cash flow statement) e. What effect do the two above amounts have on the cash flow statement and why are the amounts added or subtracted?

Goodwill. 1st Post Due by Day 3. Based on this week’s reading and weekly lecture: ï‚· Explain how Goodwill is computed. ï‚· Does the fair value of assets versus the book value have any effect on the recognition of goodwill? Provide an example with the associated journal entry. ï‚· Will the amount of Goodwill recognized change based upon the percent of the company purchased? Can the amount be the same? ï‚· In a percent acquisition, what would cause the amount of Goodwill to be non-proportional? Provide examples to support your answer. ï‚· Discuss the differences between goodwill and a bargain purchase. Provide an example to support your conclusion. ï‚· Discuss the treatment of goodwill that exists on a subsidiary’s books.

Cost Method Versus the Equity Method. 1st Post Due by Day 3. Based on this week's reading and weekly lecture, explain the difference between the cost method, the equity method, and the fair value method. Provide examples to support your explanations.

Accounting for Investments. 1st Post Due by Day 3. Gant Company purchased 20 percent of the outstanding shares of Temp Company for $70,000 on January 1, 20X6. The following results are reported for Temp Company: 20X6 20X7 20X8 Net income 40,000 35,000 60,000 Dividends paid 15,000 30,000 20,000 Fair value of shares held by Gant January 1 70,000 89,000 86,000 December 89,000 86,000 97,000. Determine the amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year, assuming Gant uses the following methods in accounting for its investment in Temp: a. Cost Method 20X6 20X7 20X8 Dividend Income Balance in investment. b. Equity Method 20X6 20X7 20X8 Dividend Income Balance in investment. c. Fair value Method 20X6 20X7 20X8 Dividend Income Balance in Investment.

Paper For Above instruction

Financial accounting for investments plays a critical role in accurately reflecting a company's financial position, especially when it involves significant acquisitions such as Disney's purchase of Star Wars-related assets. This paper explores the classification of Disney properties, the conceptual and practical aspects of Goodwill, differences among investment accounting methods, and specific case applications, including Disney's investment strategies and the valuation of investments by Gant Company.

Classifying Disney Properties and Acquisition Details

Disney's acquisition of Star Wars for approximately $4 billion was a strategic move that added a highly valuable brand to its portfolio. According to the Walt Disney 2013 Annual Report and the "Disney Buys Star Wars" video, Disney acquired extensive rights to the Star Wars franchise, including intellectual property rights, merchandise, licensing, and related media properties. These rights enable Disney to harness the franchise's cultural and commercial value across numerous platforms, from merchandise to media content, leading to a significant boost in Disney’s entertainment empire.

Forbes staff Dorothy Pomerantz classifies Star Wars as a franchise property that extends across numerous media and retail segments, emphasizing its role as a "persistent intellectual property" that can generate revenue for decades. This classification underscores the importance of the franchise as a long-term strategic asset, not merely a collection of isolated properties.

Ownership Stakes and Accounting for Investments

The Walt Disney Company owns significant portions of several entities, including Lucasfilm, Hulu, AETN (which owns channels like History and A&E), UTV, and Seven TV. Disney's ownership percentages vary: it owns 100% of Lucasfilm following the acquisition, while it holds minority stakes in Hulu, AETN, UTV, and Seven TV. For Lucasfilm, Disney consolidates its financial statements, treating it as a subsidiary. However, for investments like Hulu and others, it often uses the equity method when significant influence is present, typically ranging from 20% to 50% ownership.

The company accounts for its investments via different methods: for wholly owned subsidiaries, consolidation is required; for significant influence investments, the equity method applies; and for passive investments, the cost or fair value method is used. For example, Disney accounts for its investment in Hulu using the equity method, recognizing its share of profit or loss attributable to its stake.

Investment Income and Cash Flow Impacts

The increase in the investment account during the year is expected to result from the company's share of investee net income, recognized under the equity method, which balances the investment account. Conversely, dividends received from investees decrease the investment account, reflecting cash flows from the investments.

These transactions influence the cash flow statement: the investment income increases operating cash flow when reported as dividends received, while dividends paid reduce cash flows from investing activities. These are adjusted accordingly because they represent real cash inflows and outflows that impact not only the investment account but also the company's liquidity.

Goodwill: Computation, Recognition, and Impairment

Goodwill is computed as the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The formula typically is: Goodwill = Purchase Price – (Fair Value of Assets – Liabilities). When the fair value of the assets exceeds their book value, it can influence the recognition and measurement of goodwill, potentially leading to a different goodwill amount in the books.

An example journal entry upon acquisition might be:

Dr. Assets (fair value)

Dr. Goodwill


Cr. Cash or Notes Payable

Whether the amount of goodwill recognized changes depends on the percentage of the acquired company and the valuation of assets and liabilities. Proportional acquisitions can lead to non-linear changes in goodwill, especially when fair values differ significantly from book values. For instance, overpaying relative to proportional ownership can result in non-proportional goodwill, which might be observed in strategic acquisitions where a premium is paid for synergies.

Goodwill on subsidiaries' books is subject to impairment testing annually or when impairment indicators arise, ensuring the carrying amount does not exceed recoverable amount.

A bargain purchase occurs when the purchase price is less than the fair value of net identifiable assets, resulting in a gain on acquisition, fundamentally opposite to goodwill creation, which leads to a goodwill impairment or gain recognition, depending on circumstances.

Cost Method, Equity Method, and Fair Value Method

The cost method records investments at purchase cost, recognizing dividends as income; it assumes no influence (ownership less than 20%). The equity method, applicable when significant influence exists (20%-50%), increases the investment for the investor's share of net income and decreases it for dividends received. The fair value method values investments at current market value, with unrealized gains or losses recognized in earnings or other comprehensive income, depending on classification.

For example, under the cost method, Gant’s initial investment is recorded at $70,000, and dividends are recognized as income. Under the equity method, Gant increases its investment by Gant’s share of Temp's net income and decreases it by dividends received. The fair value method adjusts the investment to fair value at each period end, with gains and losses affecting net income accordingly.

Investment Accounting Application

Gant’s investment in Temp Company demonstrates how these methods impact financial reporting:

  • Cost Method: Investment initially $70,000, annual dividends recognized as income, remaining balance unchanged until sale or impairment.
  • Equity Method: Investment is adjusted annually by Gant’s share of Temp’s income (20%) and dividends received, leading to a dynamically changing investment balance.
  • Fair Value Method: Investment value fluctuates with Temp's share price, with unrealized gains/losses recognized in earnings, affecting the reported investment value each year.

This comprehensive approach to investment accounting highlights the importance of selecting an appropriate method reflecting the degree of influence and investment objectives, aligning with generally accepted accounting principles (GAAP).

Conclusion

Understanding the classification of assets like those acquired by Disney, the computation and treatment of goodwill, and the differences among the cost, equity, and fair value methods are central to accurate financial reporting and strategic decision-making. Each method provides different insights into a company's investments, influencing how stakeholders perceive corporate value and performance. Proper application of these principles ensures transparency, compliance, and improved financial analysis.

References

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