Big Co. acquired 1,000 shares of voting stock in Little Co. for $100,000 cash. Little Co. currently has 10,000 shares of voting stock issued and outstanding. Little Co.'s shares are trading at $115 per share. Big Co. subsequently receives a dividend of $0.20 per share from Little Co.

Big Co. acquired 3,000 shares of voting stock in Small Co. for $300,000 cash. Small Co. currently has 10,000 shares of voting stock issued and outstanding. Big Co. subsequently receives a dividend of $0.10 per share from Small Co. During the year, Small Co. had a net income of $500,000, and sold $100,000 of inventory to Big Co. Small Co. applies a 15% markup on its inventory. At the end of the year, Big Co. has $20,000 remaining in inventory.

Big Co. acquired all of the outstanding shares of voting stock in Tiny Co. for $1,000,000 on January 1, 2009. The fair market value of Tiny Co.'s stock at acquisition was $800,000.

Prepare a Word document of 3–5 pages that covers the following:

Determine and provide the proper accounting method for Big Co.'s investment in each of the 3 companies described above. Provide the reasons for your answer.

Prepare the basic journal entries under the proper accounting method to record Big Co.'s investments in Little Co. and Small Co. based on the facts provided.

John Smith, CFO of Big Co., has asked for a summary of how to properly account for the acquisition of Tiny Co. from you, his external auditor. Prepare a professional, business-quality memorandum of at least 350 words to John Smith, and include the following in it:

Outline the proper accounting for this acquisition.

Review the SFAS relating to business combinations on the FASB's Web site to be sure you relate all necessary facts to John Smith. Areas that this memorandum should cover include the following:

Which method to use

Changes in accounting treatment from prior acquisitions

Goodwill

Financial statement presentation

(a) Big Co. acquired 1,000 shares of voting stock in Little Co. for $100,000 cash. Little Co. currently has 10,000 shares of voting stock issued and outstanding. Little Co.'s shares are trading at $115 per share.

(b) Big Co. acquired 3,000 shares of voting stock in Small Co. for $300,000 cash. Small Co. currently has 10,000 shares of voting stock issued and outstanding.

(c) Big Co. acquired all of the outstanding shares of voting stock in Tiny Co. for $1,000,000 on January 1, 2009. The fair market value of Tiny Co.'s stock at acquisition was $800,000.