Limitless Inc. (LI) for $650,000.
It is now January 20, 2021, and Skyline is preparing for its December 31 year-end audit. You have been hired to provide advice on a number of issues as part of the audit preparation. Skyline's bookkeeper, Susan, outlined below the areas where she would like your assistance. For the issues identified, Susan has asked that you draft any journal entries that are necessary.
Your firm is not the auditor of Skyline. Skyline reports its financial statements in accordance with accounting standards for private enterprises (ASPE).
The journal entry recorded for the LI acquisition was as follows:
DR Investment in LI shares 650,000
CR Cash 650,000
LI's balance sheet as of the date of acquisition was as follows:
Cash $110,000
Accounts receivable $85,000
Furniture and fixtures, net $95,000
Total assets $290,000
Accounts payable $50,000
Long-term debt $115,000
Common shares $10,000
Retained earnings $115,000
Total liabilities and equity $290,000
For the assets and liabilities reported above, fair value is equal to book value, except for the furniture and fixtures, which have a fair value of $40,000 and a remaining useful life of four years.
The primary reason Skyline acquired LI was to gain access to its customer list. The customer list, although not reported on LI's balance sheet because it was internally generated, is LI's most valuable asset at an estimated $350,000. It has an estimated useful life of five years.
LI and Skyline use the taxes payable method of accounting for income taxes.
Susan understands that there are options available under ASPE to account for investments, and she would like you to explain each of these options to her. She is not sure which option is best for Skyline, but the CFO told her that it will be important for the board to be able to review the combined results of Skyline and its acquired companies. After you explain each of the options available to account for the new investment, provide a recommendation as to which one Skyline should use.