a.
Prepare the
a.
Explanation of Solution
An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.
An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded on a stock exchange.
If an investor holds an equity interest that does not convey control or significant influence over an investee, then the investor is required to use the fair value method to account for the equity investment if the equity securities have a fair value that can be easily determined.
Once an additional equity stake in the investee is acquired, which increases the level of ownership to a significant influence over the investee, then the investor must start using the equity method to account for the investment. However, the investor must mark the preexisting equity holding to a fair value immediately before accounting for the investment under the equity method.
The required journal entries recorded by the investor company on 1 Mar 2019 are as follows:
| Date | Accounting Explanation | Amount ($) | Amount ($) |
| Equity investment | |||
| Unrealized Holding Gain | |||
| (To mark the preexisting holding of equity securities to fair value) | |||
| Equity investment | |||
| Cash | |||
| (To record the acquisition of additional equity securities) |
Working notes:
Investor Company acquires 8% of the common stock of the investee company on Feb 15, 2018 for
On December 31, 2018, the fair value of the 8% common stock investment is
On March 1, 201 9, the investor company acquires an additional 17% of common stock of the investee for $765,000 overall increasing ownership to 25%.
Calculate the implied fair value of the entire investee entity on Mar 1, 2019:
This indicates that the original 8 percent investment has a fair value of $360,000, and the investor must realize a holding gain of $20,000 (i.e. $360,000 − $ 340,000) to write the securities down.
b.
Prepare the journal entries recorded on 1 Mar 2019 by the investor company, assuming
that the investor determined the investee's common stock on 15 February 2018 does not
have a fair value readily determinable and an additional 17 percent common stock on 1
March 2019, purchasing qualifies as an observed price change in order shipping
transaction.
b.
Explanation of Solution
An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.
An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded on a stock exchange.
If the equity securities had no readily determinable fair value, then the investor would have used a cost-based approach to accounting for the securities. Failing impairment other than temporary, the Equity Investment account would have remained at the original cost until additional securities were purchased. If the transaction to purchase the additional interest in an orderly transaction is considered an observable price change, then the original investment would have been marked up to a fair value on the date the additional securities are obtained.
Here, the amount of gain / loss to be recognized is based on the fair value implied by the original investment of 8 per cent.
On March 1, 201 9, the investor company acquires an additional 17% of common stock of the investee for $765,000 overall increasing ownership to 25%.
Calculate the implied fair value of the entire investee entity on Mar 1, 2019:
This indicates that the original 8 percent investment has a fair value of $360,000, and the investor must realize a holding gain of $20,000 (i.e. $360,000 − $ 340,000) to write the securities down.
The required journal entries recorded by the investor company on 1 Mar 2019 are as follows:
| Date | Accounting Explanation | Amount ($) | Amount ($) |
| Equity investment | |||
| Unrealized Holding Gain | |||
| (To mark the preexisting holding of equity securities to fair value) | |||
| Equity investment | |||
| Cash | |||
| (To record the acquisition of additional equity securities) |
c.
Prepare the journal entries recorded on 1 Mar 2019 by the investor company, assuming
that the investor determined the investee's common stock on 15 February 2018 does not
have a fair value readily determinable and an additional 17 percent common stock on 1
March 2019, purchasing does not qualifies as an observed price change in order shipping
transaction.
c.
Explanation of Solution
An acquisition of assets is the purchase of a corporation by purchasing its assets rather than its stock. An acquisition is when one company acquires most or all of the shares of another company to gain control over that company. An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded in a stock exchange.
An investment in equity is money which is invested in a company by buying that company's shares in the stock market. Typically, those shares are traded on a stock exchange.
If the equity securities had no readily determinable fair value, then the investor would have used a cost-based approach to accounting for the securities. Failing impairment other than temporary, the Equity Investment account would have remained at the original cost until additional securities were purchased. If the transaction to purchase the additional interest in an orderly transaction is not considered an observable price change, then the original investment would have remained at the original cost even after the additional securities are obtained. Here, there is only need to record the purchase of additional securities.
The required journal entries recorded by the investor company on 1 Mar 2019 are as follows:
| Date | Accounting Explanation | Amount ($) | Amount ($) |
| Equity investment | |||
| Cash | |||
| (To To record the acquisition of additional equity securities) | |||
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Chapter 1 Solutions
ADVANCED ACCOUNTING
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