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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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