Tiger Tech, Inc. is an early-stage privately-held entity that is developing renewable energy

technologies.

Year 1

At the end of Year 1, a group of institutional investors get together and invest in Tiger Tech. As

part of the transaction, Hunter Company invests $15 million for 15,000 Tiger Tech’s common

shares at $1,000 per share. Each outstanding share of Tiger Tech’s common stock entitles its

holder to one vote. At the conclusion of the transaction, Tiger Tech has 100,000 common shares

outstanding and an implied aggregate equity value of $100 million at $1,000 per share. Hunter

holds a 15% interest in Tiger Tech. (Note: Implied aggregate equity valuation for private

companies = Number of common shares outstanding × price per share. It is similar to the

market value for publicly traded companies.)

Year 2

Early in Year 2, because it needs more capital to fund its research and development as well as

marketing efforts, Tiger Tech sells 50,000 newly issued common shares at $1,200 per share to

Dragon, Inc. for $60 million. These common shares have voting rights identical to the existing

Tiger Tech common shares.

Because Tiger Tech common shares are not publicly traded, Hunter’s investment in Tiger Tech

does not have a readily determinable fair value. Therefore, Hunter elects ASC 820-10-35-59,

which permits Hunter to use Tiger Tech’s implied aggregate equity value when estimating the

fair value of the equity investment. For Year 2, Tiger Tech reports a net loss of $18 million.

Tiger Tech does not pay cash dividends.

Year 3

In Year 3, Hunter purchases additional 15,000 Tiger Tech common shares at $1,200 per share

from another early investor. Further, Hunter’s CEO becomes a member on the Board of

Directors at Tiger Tech and participates in the business decision-making processes of Tiger

Tech. For Year 3, Tiger Tech reports a net loss of $15 million. Tiger Tech does not pay cash

dividends.

Year 4

In Year 4, the Federal Reserve rapidly raises interest rates, increasing the risk of an economic

recession and negatively affecting publicly traded technology companies’ stock valuation. Tiger

Tech needs additional funds and sells 10,000 shares of $100 par preferred stock at $1,200 per

share to a group of angle investors (e.g., wealthy individuals). The preferred stock has no voting

power, is not convertible into common stock, but has a liquidation preference. It also carries an 8% cumulative preferred dividend rate. It must be redeemed by Tiger Tech in the event of an initial public offering.

Required:

Answer the following questions related to Hunter’s investment in Tiger Tech. The Fair Value

Adjustment account’s beginning balance in Year 1 on Hunter’s financial statement is zero.

1. Prepare the journal entry for Hunter at the end of Year 1 for its initial investment. What is the

effect of the initial investment on Hunter’s balance sheet, income statement and statement of

cash flows?

2. (1) What is the implied aggregate equity value of Tiger Tech in Year 2 based on its

transaction with Dragon, Inc.? What is the ownership percentage of Hunter in Tiger Tech at

the conclusion of this transaction?

(2) What accounting method should Hunter use to measure its investment in Tiger Tech in

Year 2? Prepare the journal entry for Hunter in Year 2.

3. (1) What is the ownership percentage of Hunter in Tiger Tech at the conclusion of its share

purchase in Year 3?

(2) What accounting method should Hunter use to measure its investment in Tiger Tech in

Year 3? Prepare all necessary journal entries for Hunter in Year 3. Provide the FASB ASC

to support your answer to this question.1

(Hint: Look into ASC Topic 323.)

4. (1) What accounting method should Hunter use to measure its investment in Tiger Tech in

Year 4 after Tiger Tech’s issuance of preferred stock? Provide the FASB ASC to support

your answer to this question.

(2) Do you think Tiger Tech’s equity valuation has increased or decreased in Year 4? Briefly

explain your rationale.