Question
In: Accounting
On January 1, 2018, Access IT Company exchanged $910,000 for 40 percent of the outstanding voting...
On January 1, 2018, Access IT Company exchanged $910,000 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 $1,870,000.
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 | $ | 52,000 | $ | 32,000 | |||
| Investment in Net Connect | 910,000 | ||||||
| Capitalized software | 972,000 | 147,000 | |||||
| Computer equipment | 1,057,000 | 47,000 | |||||
| Communications equipment | 907,000 | 327,000 | |||||
| Patent | 182,000 | ||||||
| Total assets | $ | 3,898,000 | $ | 735,000 | |||
| Long-term debt | $ | (932,000 | ) | $ | (607,000 | ) | |
| Common stock-Access IT | (2,570,000 | ) | |||||
| Common stock-Net Connect | (32,000 | ) | |||||
| Retained earnings | (396,000 | ) | (96,000 | ) | |||
| Total liabilities and equity | $ | (3,898,000 | ) | $ | (735,000 | ) | |
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 $1,365,000.
Prepare an acquisition-date consolidated worksheet for Access IT and its variable interest entity
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Expert Solution
| FMV of Net Connect's Net Assets (excluding Goodwill) | |
| FMV of Net Connect's book assets | $7,35,000 |
| FMV of Net Connect's book liabilities | -$6,07,000 |
| FMV of Research project not in books | $18,70,000 |
| Total (A) | $19,98,000 |
| Total Value to be assigned to Net Connect | |
| Acquisition Price Paid for stock of Net Connect (40%) | $9,10,000 |
| FMV of NCI (60%) | $13,65,000 |
| Total (B) | $22,75,000 |
| Value to be assigned to Goodwill (B) - (A) |
$2,77,000 |
| Entries to be passed | ||||
| 1 | Common stock-NetConnect Dr | $32,000 | ||
| Retained earnings Dr | $96,000 | |||
| To Investment in NetConnect (40%) | $51,200 | |||
| To Noncontrolling interest (60%) | $76,800 | |||
| 2 | Research and development asset Dr | $18,70,000 | ||
| Goodwill Dr | $2,77,000 | |||
| To Investment in NetConnect (40%) | $8,58,800 | |||
| To Noncontrolling interest (60%) | $12,88,200 |
| ACCESS IT COMPANY AND NET CONNECT | |||||||
| Consolidation Worksheet | |||||||
| January 1, 2018 | |||||||
| Consolidation Entries | Consolidated | ||||||
| Access IT | Net Connect | Total | Debit | Credit | NCI | Balances | |
| Cash | $52,000 | $32,000 | $84,000 | $84,000 | |||
| Investment in NetConnect | $9,10,000 | $9,10,000 | $9,10,000 | $0 | |||
| Capitalized software | $9,72,000 | $1,47,000 | $11,19,000 | $11,19,000 | |||
| Computer equipment | $10,57,000 | $47,000 | $11,04,000 | $11,04,000 | |||
| Communications equipment | $9,07,000 | $3,27,000 | $12,34,000 | $12,34,000 | |||
| Research and development asset | $0 | $18,70,000 | $18,70,000 | ||||
| Patent | $1,82,000 | $1,82,000 | $1,82,000 | ||||
| Goodwill | $0 | $2,77,000 | $2,77,000 | ||||
| Total assets | $38,98,000 | $7,35,000 | $46,33,000 | $21,47,000 | $9,10,000 | $0 | $58,70,000 |
| Long-term debt | -$9,32,000 | -$6,07,000 | -$15,39,000 | -$15,39,000 | |||
| Common stock-Access IT | -$25,70,000 | -$25,70,000 | -$25,70,000 | ||||
| Common stock-NetConnect | -$32,000 | -$32,000 | $32,000 | $0 | |||
| Retained earnings | -$3,96,000 | -$96,000 | -$4,92,000 | $96,000 | -$3,96,000 | ||
| Noncontrolling interest | $0 | $13,65,000 | $13,65,000 | -$13,65,000 | |||
| Total liabilities and equity | -$38,98,000 | -$7,35,000 | -$46,33,000 | $1,28,000 | $13,65,000 | $13,65,000 | -$58,70,000 |
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