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, the investment holding company of Warren Buffett, reports its “less than 20% ownership” investments according to generally accepted accounting principles. However, it also provides additional disclosures that it terms “look-through” earnings.
Warren Buffett states,
Many of these companies (in the less than 20% owned category) pay out relatively small proportions of their earnings in dividends. This means that only a small proportion of their earning power is recorded in our own current operating earnings. But, while our reported operating earnings reflect only the dividends received from such companies, our economic well-being is determined by their earnings, not their dividends.
The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by whether we own 100%, 50%, 20%, or 1% of the businesses in which they reside.... Our perspective on such “forgotten-but-not-gone” earnings is simple: the way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what’s next done with it. I believe the best way to think about our earnings is in terms of “look-through” results, calculated as follows: Take \left(\lt \right)$; subtract... incremental taxes we would have owed had that$250 million been paid to us in dividends; then add the remainder,$220 million, to our reported earnings of$371 million. Thus our, “look-through” earnings were about $590 million.
Source: Warren Buffett, The Essays of Warren Buffett: Lessons for Corporate America, edited by Lawrence A. Cunningham, pp. 180–183 (excerpted).
- What are “look-through” earnings?
- Why does Warren Buffett favor “look-through” earnings?
Wren Co. operates a chain of gift shops. The company maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Whims Funds, by the fifteenth of the month following the end of each quarter. Assume that the pension cost is $141,500 for the quarter ended March 31.
a. Journalize the entries to record the accrued pension liability on March 31 and the payment to the funding agent on April 15