Acct 242 Chapter 1 Quiz Problem 1 (30 points) Smithers & Reilly (“S&R”) is a health-care consultancy firm located in the United States. On 1/1/20x1, S&R acquired a 15% interest in Tata and Associates, a competitor consultancy located in the UK. The acquisition agreements states that: • Smithers & Reilly will acquire 15% of the voting common stock of Tata and Associates for a cash payment of $160,000 • The two companies will work closely coordinating their cross-border business activities, including sharing intellectual property and technological support, when necessary, at an agreed cost-based rate. • Smithers & Reilly’s will elect two members of Tata’s board of directors, and they have the right to review and approve any long-term financing arrangements proposed or entered into by Tata. • If, with future investment in Tata, Smithers & Reilly’s investment exceeds 40%, S&R will also have the right to approve all members of Tata’s board of directors, the board chair, and any all senior executives of the company, in addition to directing the preparation of their strategic business direction and business plan. • Tata and Associates common stock is actively traded on the NSE, the National Stock Exchange of India, Limited. At the time of the acquisition, Tata’s net book value was $800,000. The carrying amount of their asset and liability accounts equaled their fair values, except for an in-process R&D, with a remaining useful life of 10 years and whose value accounted for the investor’s excess cost over book value. Net income and dividends declared and paid by Tata Associates were: fye 12/31/20x1 Net income $180,000 Dividends declared and paid $70,000 Fair value of investment in Tata $325,000 fye 12/31/20x2 $200,000 $80,000 $375,000 Required For Smithers & Reilly’s investment in Tata, prepare the journal entries to record: A. The S&R’s investment in 15% of the common stock of Tata and Associates. B. For fiscal years ending 20x1 and 20x2, prepare S&R’s journal entries related to their investment in Tata & Associates. C. Prepare a schedule detailing the changes in the balance of S&R’s investment in Tata account from 1/1/20x1 to 12/31/20x2. Bonus Question #1 (5 points) Smithers and Reilly plans to increase their investment in Tata and Associates to 45%. Management asks you to explain the implications for their accounting for their investment in Tata including the accounting method to be applied, implications for recognizing Tata’s income and dividends, & preparation of financial statements. (Please be brief and use bullet points rather than long detailed paragraphs) Problem 2 (4o points) On 1/1/20x0, Prospector, Inc. paid $5,875,000 to acquire 100% of the outstanding common stock of Sinclair Company. After the acquisition, Sinclair will remain in business as a separate operating company. Additionally, Prospector, Inc. will account for their investment using the equity method. At the acquisition date, Sinclair Corporation’s stockholders’ equity was as follows: Sinclair Corporation Statement of Shareholders' Equity 1/1/20x0 Retained earnings Common Stock Total Shareholders’ Equity 1/1/20x0 $1,500,000 500,000 $2,000,000 In addition, the fair value in excess of book value and the remaining useful lives of certain noncurrent assets/noncurrent liabilities of Sinclair Company at acquisition were: • Software licenses, (10-years): $2,500,000, • Unpatented technology (8 years): $800,000, and • Understatement of long-term debt (5 years): $100,000 The book value of all other assets and liabilities were equal to their fair values. During 20x0, Sinclair reported net income of $480,000 while paying dividends of $25,000. During 20x1, Sinclair reported net income of $960,000 while paying dividends of $50,000. Required A. Record Prospector Inc.’s acquisition of Sinclair Corporation at 1/1/20x0. B. Prepare a schedule showing the allocation of the purchase price to the fair value of the net assets acquired, including periodic depreciation/amortizations of the related purchase price adjustments. C. Prepare a schedule showing the computation of goodwill recorded at acquisition, if any. D. Prepare Prospector’s journal entries for 20x0 and 20x1 related to their acquisition of Sinclair Company. E. Prepare the consolidating worksheet journal entries for fiscal year-ending 20x0. F. Prepare the consolidating worksheet journal entries for fiscal year-ending 20x1. Bonus Question #2 (5 points) On 1/1/20x1, Palma Company acquires a 25% investment in the voting common stock of Small Fish, Inc. for $150,000. Palma Company accounts for their investment using the equity method. (Assume that the book values of Small Fish’s net assets equal their fair values, and that Small Fish is not a dividend payer.) For fiscal year-end 20x1 and 20x2, Small Fish, Inc. incurs a net loss of $500,000 and $300,000, respectively. For fiscal year-end 20x3, Small Fish, Inc. returns to profitability generating net income of $75,000 Required: Prepare a schedule showing the activity in Palma Company’s investment in Small Fish from initial investment to fiscal year-end 20x3. Your schedule should begin with Palma’s initial investment and show how the investment account is adjusted by Small Fish’s periodic income or loss. Problem 3 (30 points) On 1/1/20x1, Petwoud Company exchanged 25,000 shares of its $1 par value common stock and $150,000 cash to acquire 80% of the outstanding voting common stock of Supagud, Inc. At the acquisition date, the fair value of Petwoud Company’s common stock was $20 per share. Petwoud’s payment includes a control premium of $15,000. Other investors, unrelated to Petwoud Company, hold the remaining 20% of the outstanding common stock of Supagud. After the acquisition, Supagud, Inc. will continue as a separate operating company. In its separate accounting records, Petwoud Company will apply the equity method to account for their investment in Supagud. The pre-acquisition trial balance for Supagud at 1/1/20x1 was: Cash Accounts receivable Other current assets Buildings Land Accounts Payable Long-term debt Common stock Retained earnings 50,000 125,000 105,000 510,000 217,000 35,000 300,000 420,000 252,000 At the acquisition date, Supagud’s building had a fair value of $538,000 and they controlled an unrecorded patent with a fair value of $80,000. The book value of all other assets and liabilities of Supagud were equal to the relate fair values. At 1/1/20x1, the remaining useful lives of the building and the unrecorded patent were 10 years and 20 years, respectively. Supagud’s 20x1 net income and dividends were: Net income Dividends declared and paid $75,000 $30,000 Supagud did not issue any common stock during fiscal year 20x1. Required A. Prepare the journal entry to record Petwoud Company’s investment in Supagud, Inc. at 1/1/20x1. B. Prepare a schedule showing the allocation of the purchase price to the fair value of the net assets acquired, including periodic depreciation/amortizations of the related purchase price adjustments. C. Prepare a schedule showing the computation of goodwill recorded at acquisition, if any. D. Prepare the worksheet consolidation journal entries for fiscal year-ending 12/31/20x1.