You are an accountant at RTB, a private company specializing in software design.
ID: 2461647 • Letter: Y
Question
You are an accountant at RTB, a private company specializing in software design. In order to expand the company operations, RTB invested $1 million to purchase 100% of Fleck Company on January 1, 2016. RTB applied the acquisition method for this acquisition and has applied the equity method to account for the investment in the subsidiary. At the time of the acquisition, Fleck Company had the following assets and liabilities;
Cash $100,000
PPE $200,000
Accounts Payable $50,000
Common Stock $250,000
In addition, Fleck Company had an unrecorded patent valued at $200,000 with a 5 year remaining useful life and a customer list valued at $150,000 with a 15 year remaining useful life. When collecting the customer list, Fleck Company agreed not to sell any customer information to third parties. As RTB is a private company, they have elected to use the accounting alternatives presented by the Private Company Council (http://www.fasb.org/pcc). As the accountant for RTB you have identified ASU 2014-02 as well as ASU 2014-18 as relevant pieces of information for this acquisition using the guidance under the Private Company Council. During 2016, Fleck Company recorded net income of $100,000 and paid a dividend of $40,000.
Requirements:
For all of your answers please provide calculations and support from the Accounting Standards Codification or from the Accounting Standards Updates (ASU’s).
1. Prepare the consolidation worksheet entries for Fleck Company for December 31, 2016.
Explanation / Answer
Goodwill acquired on purchase of shares of Fleck company
Consideration paid = 1000000
Net asset acquired =
Cash = 100000
Add: PPE = 200000
Add: Unrecorded patend = 200000
Add: Customer list = 150000
Less : accounts payable = 50000
Net asset = 600000
Now Goodwill = Purchase consideration - asset acquired
= 1000000 - 600000,= 400000
This Goodwill be written off in 10 years
i.e = 400000 / 10,= 40000 per year starting from December 31, 2016
Further All assets and liabilities acquired will be added to cost of assets of RTB for consolidation purpose
Patent valued at 200000 will be depreciated in next 5 years at = 200000 /5,= 40000 per year starting dec 31, 2016
and customer list at 150000 will be depreciated in next 15 years at = 150000 / 15,= 10000 per year starting dec 31, 2016
Value of investment at end under equity method
Cost of investment = 1000000
+ Income from subsidary = 100000 ( this amount has second effect on income of RTB )
- dividend paid = 40000
= 1060000
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