Kilo Corporation $($the Company$),$ a privately owned entity, has been a

long$-$time client of your firm. You are an audit manager assigned to this

engagement for the year ended December $31,2023.$ Although the Kilo

audit is normally a very $$clean$$ audit, the $2023$ audit has been

complicated by the Company$$s acquisition, effective January $1,2023,$ of

forty percent of the outstanding stock of Romeo Corporation $($Romeo$),$

which is also a privately owned business. You have never worked with

the equity method of accounting, and you are carefully reviewing the

Company$$s accounting and disclosures related to the CFO$$s accounting

for its investment in Romeo Corporation.

Selected information related to the Company and Romeo follows.

Kilo Corporation

Final Trial Balance

$12\mathrm{.}31\mathrm{.}23$

Debits Credits

Cash $300,000$

Accounts receivable $200,000$

Allowance for doubtful accounts $20,000$

Prepaid expenses $5,000$

Equipment $5,000,000$

Accumulated depreciation $3,500,000$

Investment in Romeo Corporation $2,500,000$

Accounts payable $75,000$

Note payable bank $400,000$

Accrued expenses $10,000$

Income taxes payable $40,000$

Common stock $500,000$

Retained earnings $2,884,000$

Revenues $7,000,000$

Equity in earnings of Romeo Corporation $300,000$

Cost of revenues $5,600,000$

Depreciation $500,000$

Interest expense $24,000$

Other administrative expenses $600,000$

$14,729,00014,729,000$

Romeo Corporation

Adjusted Trial Balances

$12\mathrm{.}31\mathrm{.}22$and$12\mathrm{.}31\mathrm{.}23$

$12\mathrm{.}31\mathrm{.}2212\mathrm{.}31\mathrm{.}23$

Cash $30,000866,000$

Accounts receivable $100,000140,000$

Allowance for doubtful accounts $5,0005,000$

Prepaid expenses $10,00015,000$

Equipment $3,000,0003,000,000$

Accumulated depreciation $2,500,0002,575,000$

Accounts payable $20,00015,000$

Note payable bank $100,000160,000$

Accrued expenses $10,00012,000$

Income taxes payable $5,0004,000$

Common stock $10,00010,000$

Retained earnings $370,000490,000$

Revenues $4,000,0005,000,000$

Cost of revenues $3,200,0003,679,000$

Depreciation $75,00075,000$

Interest expense $5,00010,000$

Other expenses including taxes $600,000486,000$

$7,020,0007,020,0008,271,0008,271,000$

Additional Information

$$ On January $1,2023,$ the Company paid $$2,200,000$ for a $40\%$

investment in Romeo Corporation, a private company.

$$ The Company accounts for its investment in Romeo Corporation

using the equity method of accounting.

$$ Romeo did not pay any dividends during the year ended December

$31,2023.$

$$ The Company$$s CFO has drafted the following note to the

Company$$s financial statements which reads as follows.

$$ The Company$$s CFO has acknowledged that the purchase price of

the Company$$s investment in Romeo considered the Board$$s belief

that the combined companies would increase Kilo$$s market share

and its prospects for increased profitability.

Equity Method Investments

Effective January $1,2023,$ the Company acquired forty percent of

the outstanding common stock of Romeo Corporation. The

purchase price was $$2,200,000,$ all of which was paid in cash. In

accordance with US GAAP, the Company has accounted for the

investment using the equity method of accounting.

After your careful review of ASC $323$ Investments, Equity Method,

and Joint Ventures, you have concluded the Company has properly

accounted for its investment in Romeo Corporation $($Romeo$).$ You

are concerned, however, with the brevity of the financial

statement disclosure regarding the acquisition and accounting for

this investment.

The CFO has indicated that he and the board do not want to make

any additional disclosures regarding the acquisition and accounting

for Romeo Corporation. They belief the disclosure in sufficient and

in substantial compliance with US GAAP.

You have discussed this with the engagement partner, and she has

suggested that you look carefully at ASC $323-10-50-3$ Investments,

Equity Method, and Joint Ventures and AU$-$C Section $705,$

Modification to the Opinion in the Independent Auditor$$s Report.

Required

After carefully reviewing the professional standards that have been

suggested by the engagement partner, prepare a technical memo

that will address.

$1.$ The Completeness or lack of completeness of the CFO$$s

proposed disclosure of the Company$$s acquisition of Romeo

Corporation and its related accounting for the investment.

$2.$ The impact, if any, on the auditor$$s report should the audit

team conclude that the Romeo acquisition disclosure is

incomplete.

$3.$ In evaluating item $2$ above, the documentation should include

an evaluation of the distinctions drawn in AU$-$C Section

$705.$A$1.$