Question

ACC 232 Financial Accounting Research Assignment 1 Issued: February 19, 2020 Due: March 4, 2020 Accounting for Long Term Investments Travel America is a manufacturer of recreational vehicles, primarily travel trailers and fifth wheelers. In 2014, Travel America purchased 25% of the outstanding common stock of Wood Creek Motor Homes, a company that manufactures motor home. Travel America anticipated acquiring controlling interest of Wood Creek at some point in the future in order to expand its product line. Travel America accounts for the investment using the equity method In January 2019 Berkshire Hathaway, a Warren Buffet company, acquired 45% of the outstanding shares of Wood Creek Motor Homes and a subsidiary of Berkshire Hathaway (Shaw Industries) also purchased 10% of Wood Creek's outstanding shares. In March 2019 Travel America nominated three of its's company management for the board of directors of Wood Creek. At the May meeting of stockholders, all three of Travel America's nominees were defeated. As a result of the election, the board of Wood Creek is now made up 100% of executive management of companies controlled by Berkshire Hathaway Travel America is wondering how these events affect its accounting policies.

Answer 1

Answer :

Travel America has only 25% of the stock in Wood reck motor homes,

Berkshire Hathway and its subsidiary Shaw industries have 45% and 10% respectively a total of 55% of the stock which is controlling interest in Wood reck motor homes  

Travel America loses below advantages

Berkshire Hathway and its subsidiary who have the majority control in the company have the sweeping power to veto or to overturn the decisions which the existing board members made as they command the majority of the votes of the company. It also gives ownership of operational and strategic decision-making processes.

When the company is generating the profits, then the controlling shareholders enjoy the largest rewards share. Such rewards include dividends, retained earnings, share splits or any of the proceeds which are received by selling the company to the other entity.

there is a majority interest of Berkshire Hathway in Wood reck motor homes company then it gives guaranteed membership in the board of directors to Berkshire Hathway. It is quite common for the person of Berkshire Hathway to have the controlling interest to become chairman of the board of directors of the company.

Sometimes the controlling interest of Berkshire Hathway becomes dangerous for the minority shareholder travel America because Berkshire Hathway having the majority control use their position sometimes to force the travel America from the company.

Travel America gain below advantages

In case the company faces a bad time, Travel America who is having the minority control gets less affected because their size of investment in the company is less as compared to Berkshire Hathway.