MGT426 Advanced Financial Accounting

QUESTION 1

Madeleine Mulroney is an engineer and computer software specialist and also the sole owner of Advanced Communication Technologies Ltd. (ACT), a company that develops technology for communication enterprises.

Madeleine has been approached by Steve Smith, the owner of Smith Technologies Inc. (STI). Steve created STI about a month ago. STI owns a patent that Steve recently registered, as well as some other basic assets such as a computer and printer used to develop the patent, as well as a bit of cash. The company has no liabilities. STI has not done any business as of date. Some development still has to be done before the patent can be used. Steve wanted to know whether ACT would be interested in buying STI.

After some negotiation, ACT agreed to the following:

· Rather than buying the shares of STI, ACT would buy the assets of STI for cash effective January 1, 2020.

· Part of the purchase price would be payable on January 1, 2020 and the rest over three years beginning January 1, 2021.

· Steve would work for ACT as a consultant for the next three years and would be paid $100 per hour.

· It cost STI $50,000 to register the patent. Steve does not know what the fair value of the patent is.

· Legal fees to finalize the deal would be about $8,000.

Madeleine believes it is a fair deal, given that STI has had no transactions yet and has earned no revenue.

Madeleine has approached you, CPA, to help her with the accounting of this acquisition. She knows that patents can be amortized over a maximum of 20 years, although she believes the type of patent currently owned by STI will likely be of little value after December 2025 as new technology is constantly being developed. She would prefer to allocate as much of the purchase price as possible to goodwill as she knows goodwill does not need to be amortized and this will avoid charges to income over the first few years.

Madeleine wants to know how to account for this acquisition, including, but not limited to, how to determine the acquisition cost, how to account for the computer equipment and patent, how to account for the legal fees, and how this would affect profit in the first year after the acquisition.

Required:

Write a memo to Madeleine in which you address her concerns and make recommendations as appropriate.

 QUESTION 2 

Platinum Inc. acquired a 65% share in Silver Inc. on January 1, 2015 for $552,500. At the date of acquisition, Silver had ordinary shares of $10,000 and retained earnings of $688,000. On this date, all assets and liabilities of Silver were fairly valued, except for the following items:

 § Land: Undervalued by 80,000

§ Equipment: Overvalued by $57,000 (6 years useful life left)

§ Bonds payable: Undervalued by 35,000 (7 years to maturity date)

Additional information:

1. Platinum uses the cost method to account for its investment in Silver.

2. Every year, Silver sells some of its products to Platinum for a markup of 25% on cost. In 2018, Silver made sales to Platinum of $150,000. Platinum still had $30,000 of it left by December 31, 2018. In 2019, Silver made sales to Platinum of $75,000. Platinum still had $15,000 of it left by December 31, 2019.

3. In 2019, Platinum imported raw materials that Silver uses for $100,000 and sold it for twice the amount to Silver. Silver still had 45% of this raw material left at December 31, 2019.

4. Silver sold equipment to Platinum on January 1, 2017 for a loss of $52,500. On the date of sale, the equipment had a remaining useful life of 7 years. Both companies use straight-line method for depreciation.

5. Silver sold a piece of land to Platinum during 2016 for a gain of $22,000, Platinum sold 40% of this land to another company in 2019 for a gain of $12,000.

6. Platinum charges Silver a $50,000 annual management fee. The management fee was fully paid on December 31, 2019.

7. Silver borrowed $300,000 from Platinum on April 1, 2019. The loan bears interest of 7.5% annually and is repayable on March 31, 2025.

8. Goodwill on acquisition was written down between 2015 and 2018 by $41,000 and in 2019 by $6,000.

9. The two companies paid the following dividends in cash during 2019:

Platinum - $184,000 Silver - $539,000

10. Both companies have a marginal tax rate of 23%.

11. Premiums or discounts on bonds can be amortized n a straight-line basis for this question.

Required:

a) Prepare the consolidated income statement for the Platinum Group for the year ended December 31, 2019, using the entity method 

b) Prepare the consolidated balance sheet for the Platinum Group as at December 31, 2019, using the entity method. (Note: show PP&E separated into cost and accumulated depreciation, not as a net amount).

c) Calculate any amounts in the consolidated financial statements that would have been different had Platinum used the parent company extension method to do consolidation.

d) What amount would appear as “dividends paid” on the consolidated financial statements?

Consider all amounts material. Round amounts to the nearest dollar.