On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date.
Marvin's net income and dividends for 2019 and 2020 are as follows:
$$\begin{array} { | l | r |r |}
\hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \
\hline \text { Net Incorne } & \mathbf { \$ 6 0 , 0 0 0 } & \mathbf { \$ 8 0 , 0 0 0 } \
\hline \text { Dividends } & \mathbf { \$ 9 , 0 0 0 } & \mathbf { \$ 1 4 , 0 0 0 } \
\hline
\end{array}$$ Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc.
What effect (if any) would Hanson's January 1, 2020 purchase have on the company's consolidated cash flows for the year?

Question

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date.
Marvin's net income and dividends for 2019 and 2020 are as follows:
$$\begin{array} { | l | r |r |} 
\hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \
\hline \text { Net Incorne } & \mathbf { \$ 6 0 , 0 0 0 } & \mathbf { \$ 8 0 , 0 0 0 } \
\hline \text { Dividends } & \mathbf { \$ 9 , 0 0 0 } & \mathbf { \$ 1 4 , 0 0 0 } \
\hline
\end{array}$$ Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc.
What effect (if any) would Hanson's January 1, 2020 purchase have on the company's consolidated cash flows for the year?

Quizplus · Accepted Answer

The purchase of 9,000 shares by Hanson Inc. on January 1, 2020 for $45,000 would result in a decrease in cash of $45,000 to the consolidated entity. This is because the purchase of shares on the open market does not involve the exchange of any other assets, and therefore only affects the cash balance of the acquiring company. The purchase would not affect the book values of Marvin Inc. or any other aspect of the consolidated financial statements, as it does not involve a business combination or other change in control.

On January 1, 2019, Hanson Inc Marvin's Goodwill Suffered an Impairment Loss of $5,000 During 2019