1. Forth Company owned 85,000 of Brown Companys 100,000 shares of common stock until January 1, 20X2, at which time it sold 70,000 of the shares to a group of seven investors, each of whom purchased 10,000 shares. On December 3, 20X2, Forth received a dividend of $9,000 from Brown. Forth continues to purchase a substantial portion of Browns output under a contract that runs until the end of 20X9. Because of this arrangement, Forth is permitted to place two of its employees on Browns board of directors.

Required

Forth Companys controller is not sure whether the company should use the equity method in accounting for its investment in Brown Company, or if the investment should be carried at fair value. The controller asked you to review the relevant accounting literature and prepare a memo containing your recommendations. Support your recommendations with citations and quotations from the Accounting Standards Codification.

2. Henderson Farms Inc. sells land to Harris Development Corporation for $2,000,000 It is also entitled to receive 6% of any future sales price of the developed land in excess of $5 million. Henderson Farms Inc. determines that its experience with similar contracts is of little predictive value, because the future performance of the real estate market will cause the amount of variable consideration to be highly susceptible to factors outside of the companys influence. Additionally, the uncertainty is not expected to be resolved in a short period of time because Harris Development Corporation does not have current plans to sell the land.

However, the following additional information becomes known to Henderson Farms Inc. two years after the contract was signed:

    Land prices have significantly appreciated in the market.
    Henderson Farms Inc. estimates that it is probable that a significant reversal of cumulative revenue recognized will not occur related to $150,000 of variable consideration based on sales of comparable land in the area.
    Harris Development Corporation is actively marketing the land for sale.

Required:

2A. Should Henderson Farms Inc. include variable consideration in the transaction price upon signing the contract? Support your answers with citations and quotations from the Accounting Standards Codification.

2B. How should Henderson Farms Inc. account for the new information (two years after contract signed)? Support your answers with citations and quotations from the Accounting Standards Codification.

       
   
       
   
       
   
       
   
   
       
   
   
   
       
   
       
   
   
   
   
       
   
   
   
   
   
   
   
   
   
   
       
   
   
   
   
   
   
   
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