Smithers & Reilly (S&R) is a health-care consultancy firm located in the United States. On 1/1/20x1, S&R acquired a 15% interest in Tata and Associates, a competitor consultancy located in the UK.

The acquisition agreements states that:

• Smithers & Reilly will acquire 15% of the voting common stock of Tata and Associates for a cash payment of $160,000
• The two companies will work closely coordinating their cross-border business activities, including sharing intellectual property and technological support, when necessary, at an agreed cost-based rate.
• Smithers & Reillys will elect two members of Tatas board of directors, and they have the right to review and approve any long-term financing arrangements proposed or entered into by Tata.
• If, with future investment in Tata, Smithers & Reillys investment exceeds 40%, S&R will also have the right to approve all members of Tatas board of directors, the board chair, and any all senior executives of the company, in addition to directing the preparation of their strategic business direction and business plan.
• Tata and Associates common stock is actively traded on the NSE, the National Stock Exchange of India, Limited.

At the time of the acquisition, Tatas net book value was $800,000. The carrying amount of their asset and liability accounts equaled their fair values, except for an in-process R&D, with a remaining useful life of 10 years and whose value accounted for the investors excess cost over book value.

Net income and dividends declared and paid by Tata Associates were:

	fye 12/31/20x1	fye 12/31/20x2
Net income	$180,000	$200,000
Dividends declared and paid	$70,000	$80,000
Fair value of investment in Tata	$325,000	$375,000

Required:

For Smithers & Reillys investment in Tata, prepare the journal entries to record:

1. The S&Rs investment in 15% of the common stock of Tata and Associates.
2. For fiscal years ending 20x1 and 20x2, prepare S&Rs journal entries related to their investment in Tata & Associates.
3. Prepare a schedule detailing the changes in the balance of S&Rs investment in Tata account from 1/1/20x1 to 12/31/20x2.

Required:

Smithers and Reilly plans to increase their investment in Tata and Associates to 45%. Management asks you to explain the implications for their accounting for their investment in Tata including the accounting method to be applied, implications for recognizing Tatas income and dividends, & preparation of financial statements. (Please be brief and use bullet points rather than long detailed paragraphs)