Question

Berkshire Hathaway, the Omaha company run by Warren Buffett, owns 13.0% of the stock of American Express Company. In 2011, American Express reported a net income of $4,935 million and declared cash dividends on common stock of $855 million. For parts 1 and 2 assume Berkshire Hathaway accounted for its investment in American Express using the equity method (even though this is not allowed for investments of less than 20%).
1. Compute the amount of income Berkshire Hathaway would recognize in 2011 from its investment in American Express.
2. Suppose Berkshire Hathaway had a balance of $6,200 million in its “Investment in American Express” account at the beginning of 2011. Compute the balance in the account at the end of 2011.
3. Because its investment in American Express is less than 20%, Berkshire Hathaway actually used the market-value method to account for its investment in American Express and classified this investment as an available-for-sale security. The market value of Berkshire Hathaway’s investment in American Express securities was $6,404 million at the end of 2010 and $7,151 million at the end of 2011.
a. Compute the amount of income recognized by Berkshire Hathaway in 2011 from its investment in American Express.
b. Under the market-value method, Berkshire Hathaway had a balance of $6,404 million in its Investment in American Express account at the beginning of 2011. Compute the balance in the account at the end of 2011.
c. Explain how Berkshire Hathaway would account for the $747 million increase in market value.
4. Indicate briefly how the following three classes of investments should be accounted for: (a) greater than 50% interest, (b) 20% through 50% interest, and (c) less than 20% interest.



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  • CreatedNovember 19, 2014
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