Question

On January 1, 2018, Access IT Company exchanged $850,000 for 40 percent of the outstanding voting stock of Net Connect. Especially attractive to Access IT was a research project underway at Net Connect that would enhance both the speed and quantity of client-accessible data. Although not recorded in Net Connect's financial records, the fair value of the research project was considered to be $1,810,000.

In contractual agreements with the sole owner of the remaining 60 percent of Net Connect, Access IT was granted (1) various decision-making rights over Net Connect's operating decisions and (2) special service purchase provisions at below-market rates. As a result of these contractual agreements, Access IT established itself as the primary beneficiary of Net Connect. Immediately after the purchase, Access IT and Net Connect presented the following balance sheets:

	Access IT				Net Connect
Cash	$	46,000			$	26,000
Investment in Net Connect		850,000
Capitalized software		966,000				141,000
Computer equipment		1,051,000				41,000
Communications equipment		901,000				321,000
Patent						176,000
Total assets	$	3,814,000			$	705,000
Long-term debt	$	(926,000	)		$	(601,000	)
Common stock-Access IT		(2,510,000	)
Common stock-Net Connect						(26,000	)
Retained earnings		(378,000	)			(78,000	)
Total liabilities and equity	$	(3,814,000	)		$	(705,000	)

Each of the above amounts represents a fair value at January 1, 2018. The fair value of the 60 percent of Net Connect shares not owned by Access IT was $1,275,000.

Prepare an acquisition-date consolidated worksheet for Access IT and its variable interest entity. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the NCI and Consolidated Totals columns should be entered with a minus sign.)

Answer 1

Calculation

Access IT Company Ownership in Net Connect = 40%

So, Non controlling interest = 60%

The companies entered in contractual agreement, so Access IT Company will be the primary beneficiary of Net Connect.

Consideration transferred	850,000
Noncontrolling interest fair value	1,275,000
Acquisition-date fair value	2,125,000
Book Value	(104,000)
Excess of Fair value over Book value	2,021,000
Research and development asset	1,810,000
Goodwill	211,000

Book Value = 26,000 + 78,000 = 104,000

Research and development asset fairvalue was not recorded in financial statements. The amount = 1,810,000 (A)

Good will = Excess of Fair value over Book value - Research and development asset fairvalue = 2,021,000 - 1,810,000 = 211,000 (A)

Non Controlling Interest % = 60%

Excess of Fair value over Book value = 2,021,000

Non Controlling Interest = 2,021,000* 60% = 1,212,600 (A)

Book Value = 104,000

Investment in NetConnect = 104,000 * 60% = 41,600 (S)

Adjustment - Common Stock Net Connect =26,000 / 104,000 * 41,600 = 25% * 41,600 = 10,400 (S)

Adjustment to Retained Earnings = 78,000 / 104,000 * 41,600 = 75% * 41,600 = 31,200 (S)

Answer:

Acquisition-date Consolidated Worksheet for Access IT and its Variable interest entity

	Access IT	Net Connect		Debit		Credit	Non Controlling Interest	Consolidated Totals
Cash	46,000	26,000						72,000
Investment in NetConnect	850,000	0			S	41,600
					A	808,400		0
Capitalized Software	966,000	141,000						1,107,000
Computer Equipment	1,051,000	41,000						1,092,000
Communications Equipment	901,000	321,000						1,222,000
Research and Development			A	1,810,000				1,810,000
Patent	0	176,000						176,000
Goodwill			A	211,000				211,000
Total Assets	3,814,000	705,000						5,690,000
Long term Debt	-926,000	-601,000						-1,527,000
Common Stock Access IT	-2,510,000	0						-2,510,000
Common Stock Net Connect	0	-26,000	S	10,400			-15,600
Retained Earnings	-378,000	-78,000	S	31,200			-46,800	-378,000
Noncontrolling interest					A	1,212,600	-1,212,600	-1,275,000
Total Liabilities and Equity	-3,814,000	-705,000		2,062,600		2,062,600		-5,690,000