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 & Reillys equity investment in Tata exceeds 15% of the outstanding voting common stock, Smithers & Reilly will be permitted to elect two members of Tatas 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 & Reillys equity investment in Tata Associates exceed 25% of Tatas 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 companys fiscal year-end, Tatas common stock traded for $21.50 per share.

Tata and Associates common stock is actively traded on a recognized and regulated stock exchange

Required

1. Describe the method Smithers & Reilly should apply in accounting for their investment in Tata and Associates, including your reason for selecting the method chosen.
2. Prepare the journal entry recording Smithers & Reillys initial investment in Tata and Associates.
3. For 20x1, prepare all of the required journal entries for Smithers & Reillys investment in Tata, as applicable.
4. In January 20x2, Mr. Smithers, the CEO of Smithers & Reilly, proposed increasing the companys 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:

1. Dividends declared and paid by Tata and Associates,
2. Increases in the fair value of Tatas common stock, and
3. Income and losses generated by Tata and Associates.

: 5. Several years after increasing their investment in Tata Associates, Smithers & Reilly notes that, due to significant competition and a decline in the customer market interest in Tata and Associates services, Tata has incurred significant losses and Smithers & Reillys investment in Tata has declined significantly.

Required: Briefly, explain how Smithers & Reilly must account for their investment in Tata and Associates on-going losses, assuming that at this point, Smithers & Reillys investment in Tata is 25% of the outstanding common stock and they apply the equity basis of accounting for that investment.

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