Problem -
On January 1, 2014, LOWTOP invested cash in the common stock of SHORTSOX, a privately held company. Certain data concerning the financial position of SHORTSOX for 2014 and 2015 are as follows:
|
Year
|
*Shares
Purchased
|
Cost per
Share
|
January 1 Book Value
per Share on
SHORTSOX Books
|
# Shares
Issued by
SHORTSOX
|
Cash Dividends
per Share Paid
December 1
|
Earnings
per Share
|
|
2014
|
7,000
|
$90
|
$79
|
27,000
|
$6
|
$17
|
|
2015
|
NA
|
NA
|
$87
|
NA
|
$3
|
$11
|
These securities are not intended for sale.
Officers of LOWTOP are represented on the SHORTSOX Board of Directors, giving LOWTOP significant influence on SHORTSOX.
The cost above book value is attributed in part to a building that is undervalued on the Balance Sheet of SHORTSOX due to the appreciation of local real estate values and also to the prime location of the land it sits on.
83% of the excess paid for the SHORTSOX shares is attributable to the building. 17% of the excess is attributable to the land it sits on.
The remaining useful life of the building is estimated at 20 years. Amortization of any excess paid uses the straight-line method and the full-year convention. Any excess paid attributable to PPE and intangible assets should be depreciated or amortized on a basis consistent with the normal depreciation or amortization treatment of said assets.
No investments were sold in either 2014 or 2015.
Required:
a) Prepare LOWTOP's journal entries to record all aspects of the SHORTSOX transactions and any adjusting entries needed at year-end for both 2014 and 2015. You may ignore taxes for these computations. Provide an explanation for each journal entry, show all calculations, and provide a detailed AX reference (down to the paragraph level) to receive full credit.
b) Compute the balance in LOWTOP's investment account for SHORTSOX as of year-end 2014 and 2015. Show your calculations and your T-account to prove your balances.
c) Compute the amount that LOWTOP will report on its Income Statement for the investment in SHORTSOX for 2014 and 2015. Show your calculations.
d) WHAT IF...
Instead of the excess value being allocated to the building and land only, what if the allocations were as follows:
- Building is 65% of excess paid over book value.
- Land is 25% of BUILDING value.
- Remaining excess is not attributable to identifiable net assets and is therefore accounted for as Goodwill.
Record your journal entry to amortize the excess paid over book value for the SHORTSOX shares at year-end 2014 only. Show all calculations and provide a detailed ASC reference (down to the paragraph level) to receive full credit.
How much of the excess paid is attributable to the
Building? $____________
Land? $____________
Goodwill? $____________