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On January 1, 2014, Roberts Corporation acquired 40 percent of the outstanding voting stock of William Company in exchange for $600,000 cash. At that time, although William's book value was $925,000,...

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On January 1, 2014, Roberts Corporation acquired 40 percent of the outstanding voting stock of William Company in exchange for $600,000 cash. At that time, although William's book value was $925,000, Roberts assessed William's total business fair value at $1,500,000.


The book values of William's individual assets and liabilities approximated their acquisition date fair values except for the equipment account, which was undervalued by $350,000. The undervalued equipment had a five-year remaining life at the acquisition date. Any remaining excess fair value was attributed to goodwill. No goodwill impairments have occurred.


During its first year of combined operations, William earned net income of $180,000 and paid dividends totaling $30,000.



Tasks:


Based on the information given above, answer the following questions:



  • As the chief finance officer (CFO) for Roberts Corporation, draft a memorandum to the president of the company in which you recommend the appropriate accounting and reporting method for the investment in the voting stock of William Company. Since the president of Roberts Corporation does not have a technical accounting background, be sure that you explain the alternatives to accounting for investments in equity securities and your recommended approach in language that he or she can clearly understand. While drafting the memorandum, consider the following:


    • Use of the equity method is indicated based upon the 40 percent ownership interest. Significant influence normally is assumed when more than 20 percent ownership is held.

    • Other factors to consider might include:


      • Is the investee under the control of the courts or other parties as a result of filing for reorganization or entering into liquidation procedures?

      • Does the investor have representation on the board of directors, or has it attempted to gain representation and been unable to do so?

      • Has the investee initiated litigation or complaints challenging the investor's ability to exercise significant influence?

      • Has the investor signed an agreement surrendering his/her ability to exercise significant influence?

      • Is majority ownership concentrated in a small group that operates the company without regard of the wishes of the investor?

      • Is the investor able to acquire the information needed to use equity method reporting?


    • Qualitative parameters include brevity and clarity.

    • Prepare all necessary general journal entries for the year ending in an Excel sheet. Include supporting calculations of all amounts in a separate schedule.



Submission Details:



  • Submit your answers in a three- to four-page Microsoft Word document using APA style.

  • Include Journal Entries on Excel Spreadsheet.



Note:This Excel sheet will be used in the subsequent weeks also.



Cite any sources you use using in the correct APA format on a separate page.


Answered 5 days After Jan 10, 2023

Solution

Khushboo answered on Jan 16 2023
38 Votes
Memo
From: CFO, Roberts Corporation
To: President, Roberts Corporation
Date: 16.01.2023
Subject: Analysis and accounting treatment of investment made by the Roberts Corporations in stocks of William Company
Brief background of the case
In this case, Roberts Corporation has purchased 40% shares of the cu
ent voting capital of William company. The entity has paid $600,000 in cash for the purchase as of 01/01/2014 whereas as of the date of the acquisition of shares, the fair value was $1,500,000. During the 1st year of operations, William Company earned $180,000 as net income from operations and has also paid $30,000 as dividends. Now, we need to analyze the reporting technique for purchase of stock in the William company and the accounting method for investment.
Accounting standards guidelines and provisions
In this case, the equity technique will be used to record the investment in William Company. The equity method is used when an entity holds substantial influence over the investing company. As per accounting standards guidelines the significant influence is treated when the investor company holds the voting shares of the investee company between 20% to 50%. In such cases, full control is treated only when the investor company is holding more than 50% shares of the investee company or the investor has the right to appoint the majority of the board of directors in the investee company and under such a scenario, the full consolidation method of accounting is used. In this case, Roberts Corporation is holding 40% of the shares of William Company and we are assuming that there is no other control or influence existing for the investee company so the equity technique will be used for investment in William Company. Further, other factors have also been considered for the determination of significant or full influence such as the investor entity's capability to acquire the full information from the investee...
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