Xinkwabbly, a privately held software company, was started by a brilliant software programmer six years ago. The founder remained the sole shareholder of Xinkwabbly at all times.
When Acquiro, Inc, purchased this privately held software company, Acquiro bought all of its outstanding stock and required the founder to serve as a consultant to the company for the two-year period following the purchase. Acquiro paid the founder a total sum of $3 million. Acquiro reported the entire $3 million as Investment in Subsidiary Stock.
a. Did Acquiro account for this acquisition correctly?
b. If not, did it gain a financial accounting reporting advantage by recording the acquisition in the manner that it did?
c. From a financial accounting viewpoint, do you believe that Acquiro had the intent to commit fraud?
d. From a tax accounting viewpoint, do you believe that Acquiro had the intent to commit tax fraud?