Setup

After two years of successful operations and profitability, the partners of HiloSati, LLP had a partner meeting to discuss potentially expanding their operations into new geographic locations and into new service$/$product offerings. Despite being profitable during $2023$ and $2024,$ the partnership would need significant additional capital to invest and cover the costs of their planned expansion. The partners decide to look for potential investors to join the business as opposed to seeking loans from banks to finance their plans.

In order to attract more potential investors, the partners decide to convert their partnership to a C$-$Corporation effective on December $31,2024.$ The new corporation was named HiloSati, Inc. and a total of $1,000$ shares of stock available, and each of the three partners was allocated a number of shares equal to their relative capital balances as of December $31,2024.$ On January $1,2025,$ the three owners of HiloSati, Inc. agree to each sell $70\%$ of their stock to an outside investor, Sharpmore, Inc. Sharpmore agrees to purchase the stock in exchange for a total of $$3,500,000$ in cash.

Valuation Specialist

In order to complete the acquisition, the involved parties decide to get a valuation done for HiloSati, Inc. The valuation specialist reports the following amounts as of January $1,2025$ which will be relevant in the accounting for the acquisition:

Estimated Fair Value of $100\%$ of HiloSati, Inc. $$5,000,000$

Common Stock Outstanding: $$1,000$

Additional Paid$-$in Capital: $249,000$

Retained Earnings: $661,604$

Total Net Book Value as of $1/1/25911,604$

The valuation specialist determines that all book values for assets and liabilities equal their fair values as of the date of acquisition with the exception of two identifiable assets. An intangible asset for a Customer List is estimated to have a fair value of $$500,000$ and has a book value of $$0.$ The Customer List has an indefinite life and is therefore not amortized. The second asset was Software that was developed by Sati with a book value of $$50,000$ and an estimated fair value of $$250,000.$ The Software has an estimated remaining useful life of four years.

Requirement #$1$

Based on the detail noted above, complete the D&D Schedule as of the date of acquisition on January $1,2025.$

Requirement #$2$

Sharpmore, Inc. uses the Equity Method to account for their investment in HiloSati, Inc. During the calendar year$-$ended December $31,2025,$ HiloSati, Inc. reported net income of $$750,000$ and declared $$0$ in dividends. Record the necessary journal entries Sharpmore, Inc. would need to record throughout $2025$ relating to their investment in HiloSati, Inc.

$+--+$

Investment in HiloSati Equity Earnings in HiloSati

Date Account Description Debit Credit

$1/1/25$

$12/31/25$

$12/31/25$

Balance as of $12/31/25--$

Requirement #$3$

The two companies are ready to perform their year$-$end consolidation Record any consolidation entries necessary to prepare the consolidated financial statements for the year ended December $31,2025.$ Note that both company's stand$-$alone financial statements for the year$-$ended December $31,2025$ are provided in requirement #$4$ below. In addition, during $2025$ Sharpmore loaned $$500,000$ to HiloSati by signing a Note Receivable. A total of $$30,000$ of interest accrued and was paid in cash on the note during $2025.$ The entire $$500,000$ note balance remained outstanding as of year$-$end.

$+--+$

Investment in HiloSati Equity Earnings in HiloSati

Date Account Description Debit Credit

$1)12/31/25$ Balance as of $12/31/25--$