Question
ACIS 4114 Advanced Accounting Spring 2020 Project 1 Attached please find a request for your consultation services from a potential client . The cover letter
ACIS 4114 Advanced Accounting
Spring 2020
Project
1
Attached please find a request for your consultation services from
a potential client
. The
cover letter supplied by
potential client
should provide
you
with sufficient
information regarding
the
requirements of the project
, but just in case anything is unclear, I wanted to add a specific list
of what is needed.
First
, you should provide a list of all journal entries that you
record
on
Mimi
s books to properly
account for their investments in
Cous
in
and
Uncle
companies.
Second, you should provide updated financial statements for
Mimi
Company reflecting the effect
of these entries.
Third, you should provide all entries, either on
Mimi
s books or as consolidating entries
,
that
would be necessary if
Mimi
Company
acquire
d
100% of
Daughter
Company
on December 31,
2018
for $
400
,000
,
and
dissolve
d
Daughter
Company as a separate legal entity
,
with a cl
ear
indication of where the
journal entries are posted
(i.e., either on
Mimi
s
books, or as
consolidating entries)
.
In addition, you should provide pro forma
consolidated
financial
statements for
the consolidated
Mimi
company
as of 12/31/2018 assuming Daughter Company
was purchased and dissolved.
A consolidation worksheet will
not
satisfy this requirement.
Finally, you should provide all entries, either on
Mimi
s books or as consolidating entries
,
that
would be nece
ssary if
Mimi
Company
acquire
d
100% of
Daughter
Company on December 31,
2018
for $
400
,000
and
Daughter
Company
continu
es to exist as a separate legal entity
,
with a
cl
ear indication of where the
journal entries are posted
(i.e., either on
Mimi
s books, or as
consolidating entries)
.
In addition, you should provide pro forma
consolidated
financial
statements for
the consolidated
Mimi
company
as of 12/31/2018 assuming Daughter company
was purchased and continued as a separate legal entity.
A consolidation worksheet will
not
satisfy this requirement.
The project is to be completed in groups of 2 or 3, and is due by
11:59PM on
Wednes
day,
April
1
st
.
Each group member is required to submit a group evaluation before your grade will be
posted. You may sign up for groups through Canvas people page. All projects must be
completed in Excel and
uploaded to Canvas by the d
eadline. Late projects will receive a 20% of
possible points
deduction for every 24 hour period late.
Dr. Garner
Dear ACIS 4114 Student,
I am
Lee, Broome, MacBay, and Luttrell, CPA
s
potential client
, and I need your
assistance
with two tasks related to accounting for investments that I am working on.
I am the CFO of
Mimi
Corporati
on, and the first task relates to two investments that my
company made on
January 1,
2018
. First, we purch
ased
40
% of
Uncle
Company for $
263
,
750
.
Second, we purch
ased
30
% of
Cousin
Company for $
56
,
250
.
On July 1,
2018
we sold
a third
of
our investment in
Cousin
(
10
% of
Cousin
Company)
for $
15
,
0
00 bringing our total ownership
interest in
Cousin
down to
2
0
%.
The
investment in
Uncle
has down quite well for us, we
estimate
the
Uncle
company stock was w
orth $
400
,000
as of Dec.31
,
2018
.
We plan to hold it
for the foreseeable future, though we could sell it if we need the cash. However, the investment
in
Cousin
didnt work out as well, a
nd we intend to sell it in the near future. As of D
ecember
31,
2018
,
we estimate
the
Cousin
Company stock
we own
was worth
only
$
20
,000
.
I know almost
nothing about accounting for investments and need your help in putting together my companys
financial statements for
the year ended December 31,
2018
.
When determining the appropriate price to pay for these investments, we determined the
f
ollowing information.
Uncle
Companys book value o
n January 1,
2018
was $
6
0
0
,000
.
However,
as of that
date,
Uncle
owned
land that was undervalued on their books by $
18
,000. In addition, we
determined that
Uncle
owned a patent
with
5
years of remaining useful life
which we
believe
was
undervalued by
27
,000
.
Cousin
s book valu
e as
of January 1,
2018
was $
15
0
,000. In addition, we determined
that
they owned
equipment
that
was undervalued by $
14
,000 and had
5
years of remaining useful
life
and a buil
ding that was undervalued by $
22
,000 and had 1
0
years of remaining useful life
.
During
2018
,
Uncle
Company earned $
50,0
00
of net inco
me
, and paid us dividends of
$
2
,00
0
on March 31,
2018
, and $
2
,00
0
on September 30,
2018
.
Cousin
Company earned $
10
,000
of net income during
2018
, and p
aid us dividends of $
1
,
200
on March 31
and
June 30
and of
$1
,000 on
September 30.
In addition,
we
bought inventory from
Uncle
Company
during
October
2018
. We
bought
$
4
0
,000 of inventory
(with an original cost to
Uncle
of $
12
,000)
.
We still have
$
8
,000 of this inventory left.
So far, we have accounted for
it
like any other
inventory purchase
.
We increased inventory when we purchased the inventory and decreased inventory when the
inventory
was sold.
As I stated above, I dont know very much about accounting for investments. Therefore,
we have done very little accounting for these two investments. Specifically, we have recorded
only the following journal entries:
D
r
Investment in
Uncle
$
263,750
Cr Cash
$
263,750
Dr
Investment in
Cousin
$
56,250
Cr Cash
$
56,250
(I havent even recorded the cash we received as dividends from them yet, because I had
no idea what the credit side of that journal entry should be.)
Therefore, my first re
quest is that you let me know what additional entries we need to
make related to these investments, and adjust the attached financial statements for
Mimi
Company for the year
ended (as of) December 31,
2018
, to reflect those entries.
My second request re
lates to a potential acquisition that we are considering. M
y company
is currently considering purchasing 100% of
Daughter
Company and my boss wants to know
what effect that investment would have on our financial statements. I have been told that one of
the
most important decisions we need to make when acquiring a subsidiary is whether to dissolve
the subsidiary as a separate legal entity, or to keep them as a separate legal entity. I am not sure
which of those decisions we would make and would like to see h
ow our financial statements
would look under each of those scenarios. So, if you could prepare pro forma financial
statements for my company under ea
ch scenario (assuming that we
pur
chased them on December
31,
2018
) that would be great.
I have attached a copy of
Daughter
s financial statements for the year ended (as of)
December 31,
2018
. As you can see their tota
l
book value on that date was $
285,2
00
. However,
we are considering an offer of $
40
0
,000
because we believe their
land
is under
valued by
$
80
,000
,
their
equipment
is undervalued by $
25
,000
, and
their outstanding reputation adds
additional value
. The
equipment
has
1
0
years of remaining life.
Please base your accounting on
the assumptio
n that we purchased them
on December 31,
2018
for $
40
0
,000
cash, and please
show the potential impact of this acquisition after including the completed accounting for our
investments in
Cousin
and
Uncle
Dr. Garner
tells me that you guys are experts at accounting for investments, and I look
forward t
o seeing the financial statements. Please let
Dr. Garner
know if there is any additional
information that you need f
rom me and I will get it to you
promptly.
Sincerely,
Potential client
Attachment A:
Mimi
Company Financial Statements
Mimi Company
Balance Sheet, As of December 31, 2018
Cash
$554,900
Accounts Receivable
$103,750
Inventory
$176,250
Investment in Uncle Company
$263,750
Investment in Cousin
Company
$56,250
Land and Buildings
$365,000
Patent
$47,500
Equipment
$90,000
Other Assets
$6,250
Total Assets
$1,663,650
Accounts Payable
$172,500
Bonds Payable
$291,250
Premium on Bonds Payable
$10,000
Other Liabilities
$70,000
Common Stock
$510,000
Additional Paid in Capital
$297,500
Retained
Earnings, 12/31
$312,400
Total Liabilities and Equity
$1,663,650
Mimi Company
Statement of Retained Earnings, for the 12 months ending December 31, 2018
Retained Earnings, 1/1
$194,000
Net Income
$198,400
Dividends Declared
$80,000
Retained Earnings, 12/31
$312,400
Mimi Company
Income Statement, for the 12 months ending December 31, 2018
Revenues
$1,057,600
Interest Income
$16,000
Gain on Sale of Equipment
$9,600
Total Revenues
$1,083,200
Cost of Sales
$716,800
Interest Expense
$16,000
Advertisement Expense
$65,600
Depreciation and Amortization Expense
$86,400
Total Expenses
$884,800
Net Income
$198,400
Mimi
Company
Board of Directors
Joshua Kramer, Chief Executive Officer and Chairman of the
Board
Joshua Kramer has served as our Chief Executive Officer since October 2005 and our Chairman
of the Board since inception. Mr. Kramer currently serves as a member
of the board of directors
of
Cousin
Company. Mr. Kramer holds an MBA degree from Stanfo
rd University and a B.A. from
James Madi
Daughter
University.
Emily McHale, Chief Executive Officer and Chairman of the Board, AdUSA, Inc.
Emily McHale has served as one of our directors since March 2006. In late 2007, Ms. McHale
founded AdUSA, Inc. where she is now Executive Chairman of the Board. Previously, Ms. McHale
served on the board of MarketMe, Inc. from January 2001 until May 2005.
Ms. McHale holds a
B.S. in Marketing from
the University of Missouri
.
Kyle Marry, Investor
Kyle Marry has served as one of our directors since July 2008. Mr. Marry was pre
viously on the
board of Playtime
, Inc. f
rom June 2000 until March 2004.
From 1978 unt
il his retirement in
1999, Mr. Marry served in management roles at Accounting for You, Inc. where he became
worldwide managing partner of market development and a member of the firms executive
committee. Mr. Marry holds an M
B
A degree from Harvard as well
as a B.S. in Accounting from
Boston Co
llege.
Attachment B:
Daughter
Company Financial Statements
Daughter Company
Balance Sheet, As of December 31, 2018
Cash
$76,200
Accounts Receivable
$152,400
Inventory
$111,000
Land and Buildings
$206,700
Software
$56,600
Equipment
$108,600
Other Assets
$54,900
Total Assets
$766,400
Accounts Payable
$123,000
Bonds Payable
$273,000
Premium on Bonds Payable
$14,200
Other Liabilities
$71,000
Common Stock
$78,000
Additional Paid in Capital
$21,500
Retained Earnings, 12/31
$185,700
Total Liabilities and Equity
$766,400
Daughter Company
Statement of Retained Earnings, for the 12 months ending December 31, 2018
Retained Earnings, 1/1
$86,600
Net Income
$102,100
Dividends Declared
$3,000
Retained Earnings, 12/31
$185,700
Daughter Company
Income Statement, for the 12 months ending December 31, 2018
Revenues
$456,400
Interest Income
$7,400
Total Revenues
$463,800
Cost of Sales
$233,000
Interest Expense
$31,600
Depreciation and Amortization Expense
$97,100
Total Expenses
$361,700
Net Income
$102,100
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