Problem 1 (25 points) Smithers & Reilly is a health-care consultancy firm located in the United States. On 1/1/20x1, Smithers & Reilly, acquired an investment in the common stock of Tata and Associates, a health-care consultancy. Smithers & Reilly paid $500,00 to acquire 25,000 shares of the outstanding voting common stock of Tata and Associates. The investment represents a 10% interest in Tata Associates as of 1/1/20x1. The two companies will work closely coordinating their business activities, including sharing intellectual property and technological support, when necessary, at an agreed cost-based rate. If, at any point in their arrangement, Smithers & Reilly's equity investment in Tata exceeds 15% of the outstanding voting common stock, Smithers & Reilly will be permitted to elect two members of Tata's board of directors and they will gain the right to review and approve any long-term debt financing arrangements entered into by Tata. At no time will Smithers & Reilly's equity investment in Tata Associates exceed 25% of Tata's outstanding common stock. During fiscal year 20x1, Tata and Associates recorded net income of $1,500,000 and they paid dividends to all common shareholders of $250,000. At 12/31/20x1, the company's fiscal year-end, Tata's common stock traded for $21.50 per share. Tata and Associates common stock is actively traded on a recognized and regulated stock exchange. 4. In January 20x2, Mr. Smithers, the CEO of Smithers & Reilly, proposed increasing the company's investment in Tata from 10% to 17%. Before making that investment, Ms. Smithers asks you to prepare a brief write-up explaining the accounting implications of making that increased investment. In your comments, explain the implications of the increased investment Smithers & Associates accounting for: a. Dividends declared and paid by Tata and Associates, b. Increases in the fair value of Tata's common stock, and Income and losses generated by Tata and Associates. C. Problem 1 (25 points) Smithers & Reilly is a health-care consultancy firm located in the United States. On 1/1/20x1, Smithers & Reilly, acquired an investment in the common stock of Tata and Associates, a health-care consultancy. Smithers & Reilly paid $500,00 to acquire 25,000 shares of the outstanding voting common stock of Tata and Associates. The investment represents a 10% interest in Tata Associates as of 1/1/20x1. The two companies will work closely coordinating their business activities, including sharing intellectual property and technological support, when necessary, at an agreed cost-based rate. If, at any point in their arrangement, Smithers & Reilly's equity investment in Tata exceeds 15% of the outstanding voting common stock, Smithers & Reilly will be permitted to elect two members of Tata's board of directors and they will gain the right to review and approve any long-term debt financing arrangements entered into by Tata. At no time will Smithers & Reilly's equity investment in Tata Associates exceed 25% of Tata's outstanding common stock. During fiscal year 20x1, Tata and Associates recorded net income of $1,500,000 and they paid dividends to all common shareholders of $250,000. At 12/31/20x1, the company's fiscal year-end, Tata's common stock traded for $21.50 per share. Tata and Associates common stock is actively traded on a recognized and regulated stock exchange. 4. In January 20x2, Mr. Smithers, the CEO of Smithers & Reilly, proposed increasing the company's investment in Tata from 10% to 17%. Before making that investment, Ms. Smithers asks you to prepare a brief write-up explaining the accounting implications of making that increased investment. In your comments, explain the implications of the increased investment Smithers & Associates accounting for: a. Dividends declared and paid by Tata and Associates, b. Increases in the fair value of Tata's common stock, and Income and losses generated by Tata and Associates. C
