Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

First, you should provide a list of all journal entries that you record on Mimis books to properly account for their investments in Cousin and

First, you should provide a list of all journal entries that you record on Mimis books to properly account for their investments in Cousin 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 Mimis books or as consolidating entries, that would be necessary if Mimi Company acquired 100% of Daughter Company on December 31, 2018 for $850,000, and dissolved Daughter Company as a separate legal entity, with a clear indication of where the journal entries are posted (i.e., either on Mimis books, or as consolidating entries). In addition, you should provide pro forma financial statements for both Mimi company as a separate legal entity, and consolidated financial statements for Mimi Company assuming Daughter Company is dissolved. A consolidation worksheet will not satisfy this requirement.

Finally, you should provide all entries, either on Mimis books or as consolidating entries, that would be necessary if Mimi Company acquired 100% of Daughter Company on December 31, 2018 for $850,000 and Daughter Company continues to exist as a separate legal entity, with a clear indication of where the journal entries are posted (i.e., either on Mimis books, or as consolidating entries). In addition, you should provide pro forma financial statements for both Mimi company as a separate legal entity, and consolidated financial statements for Mimi Company assuming Daughter Company continues to exist as a separate legal entity. A consolidation worksheet will not satisfy this requirement.

The project must be completed in Excel with formulas linking information from your journal and eliminating entries to your final financial statements. You should assume very little about Potential clients accounting skill set. So, it would be best to read everything carefully to make sure there isnt any information you need that he left out.

Dear ACIS Student,

I am Lee, Broome, MacBay, and Luttrell, CPAs 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 Corporation, and the first task relates to two investments that my company made on January 1, 2018. First, we purchased 40% of Uncle Company for $1,425,000. Second, we purchased 30% of Cousin Company for $306,450. On July 1, 2018 we sold one sixth of our investment in Cousin (5% of Cousin Company) for $50,000 bringing our total ownership interest in Cousin down to 25%. The investment in Uncle has down quite well for us, we estimate the Uncle company stock was worth $2,500,000 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, and we intend to sell it in the near future. As of December 31, 2018, we estimate the Cousin Company stock was worth only $100,000. 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 following information.

Uncle Companys book value on January 1, 2018 was $2,112,500. However, as of that date, Uncle owned land that was undervalued on their books by $150,000. In addition, we determined that Uncle owned a patent with 9 years of remaining useful life which we believe was undervalued by 135,000.

Cousins book value as of January 1, 2018 was $600,000. In addition, we determined that they owned equipment that was undervalued by $20,000 and had 5 years of remaining useful life and a building that was undervalued by $90,000 and had 10 years of remaining useful life.

During 2018, Uncle Company earned $200,000 of net income, and paid us dividends of $6,000 on March 31, 2018, and $6,000 on September 30, 2018. Cousin Company reported a net loss of $60,000 during 2018, and paid us quarterly dividends of $2,000 on March 31 and June 30 and of $1,500 on September 30. In addition, we bought inventory from Uncle Company during October 2018 and I am not sure if those purchases need to be accounted for differently. We bought $100,000 of inventory (with an original cost to Uncle of $60,000). So far, we have accounted for it like any other inventory purchase. We have $20,000 (at our price) of the inventory remaining at 12/31/2018. Specifically, we have recorded the following entry on our books (and its effect is already included in the attached financial statements):

Dr Inventory 100,000

Cr Cash 100,000

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:

Dr Investment in Uncle $1,425,000

Cr Cash $1,425,000

Dr Investment in Cousin $306,450

Cr Cash $306,450

(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 request 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 relates to a potential acquisition that we are considering. My 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 how our financial statements would look under each of those scenarios. So, if you could prepare pro forma financial statements for my company under each scenario (assuming that we purchased them on December 31, 2018) that would be great.

I have attached a copy of Daughters financial statements for the year ended (as of) December 31, 2018. As you can see their total book value on that date was $354,376. However, we are considering an offer of $850,000 because we believe their land is undervalued by $50,000, their equipment is undervalued by $200,000, and their outstanding reputation adds additional value. The equipment has 15 years of remaining life. Please base your accounting on the assumption that we purchased them on December 31, 2018 for $850,000 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 to seeing the financial statements. Please let Dr. Garner know if there is any additional information that you need from 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

$2,938,050

Accounts Receivable

$559,575

Inventory

$948,713

Investment in Uncle Company

$1,425,000

Investment in Cousin Company

$306,450

Land and Buildings

$1,969,425

Patent

$258,750

Equipment

$482,907

Other Assets

$32,230

Total Assets

$8,921,100

Accounts Payable

($934,650)

Bonds Payable

($1,575,000)

Premium on Bonds Payable

($51,132)

Other Liabilities

($371,710)

Common Stock

($2,756,250)

Additional Paid in Capital

($1,608,750)

Retained Earnings, 12/31

($1,623,608)

Total Liabilities and Equity

($8,921,100)

Mimi Company

Statement of Retained Earnings, for the 12 months ending December 31, 2018

Retained Earnings, 1/1/15

$ (1,406,256)

Net Income

$ (417,352)

Dividends Declared

$ 200,000

Retained Earnings, 12/31/15

$ (1,623,608)

Mimi Company

Income Statement, for the 12 months ending December 31, 2018

Revenues

($2,231,625)

Interest Income

($33,858)

Gain on Sale of Equipment

($18,000)

Total Revenues

($2,283,483)

Cost of Sales

$1,513,125

Interest Expense

$34,425

Advertisement Expense

$136,931

Depreciation and Amortization Expense

$181,650

Total Expenses

$1,866,131

Net Income

($417,352)

Attachment B: Daughter Company Financial Statements

Daughter Company

Balance Sheet, As of December 31, 2018

Cash

$109,927

Accounts Receivable

$219,833

Inventory

$160,144

Land and Buildings

$241,397

Software

$81,563

Equipment

$156,502

Other Assets

$79,157

Total Assets

$1,048,523

Accounts Payable

($177,412)

Bonds Payable

($393,750)

Premium on Bonds Payable

($20,385)

Other Liabilities

($102,600)

Common Stock

($112,500)

Additional Paid in Capital

($30,938)

Retained Earnings, 12/31

($210,938)

Total Liabilities and Equity

($1,048,523)

Daughter Company

Statement of Retained Earnings, for the 12 months ending December 31, 2018

Retained Earnings, 1/1/16

$ (127,501)

Net Income

$ (93,437)

Dividends Declared

$ 10,000

Retained Earnings, 12/31/16

$ (210,938)

Daughter Company

Income Statement, for the 12 months ending December 31, 2018

Revenues

($1,018,781)

Interest Income

($16,500)

Total Revenues

($1,035,281)

Cost of Sales

$606,913

Interest Expense

$82,275

Depreciation and Amortization Expense

$252,656

Total Expenses

$941,844

Net Income

($93,437)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting An Introduction

Authors: Jacqui Kew, Alex Watson

4th Edition

0199046484, 978-0199046485

More Books

Students also viewed these Accounting questions

Question

1 Why is job analysis important?

Answered: 1 week ago