Questions -
Q1. (Equity Method). Niki Company purchased 25% of the net assets of Bross Company for $1,000,000. The fair value of recorded net assets was $3,000,000. Additionally, there was an unrecorded identified intangible with a value of $1,000,000. During the first year of ownership, Bross Company had a loss of $500,000. It also paid a dividend of $200,000.
Instructions: Prepare a workpaper showing the treatment of the original purchase and subsequent financial activity during the year that culminates in the ending value of the Equity Investment account.
Q2. (Financial Investments) SubWay, LLC had the following investment activity during the year:
- January 1 investment balance = $0
- January 30 purchased 1000 shares of Lettuce Corporation for $50,000
- March 1 purchased $250,000 face value 30 year 4% coupon bond with semi-annual payments for $239,459 issued by Carrot Corporation
- May 1 purchased 1000 shares of Radish Inc. for $125,000
- July 1 sold 500 shares of Lettuce Corporation for $55,000
- November 1 purchased $1,000,000 of Cucumber Corp. commercial paper with the intention of selling it in January.
At the end of the year, observable fair values for each of the foregoing investments were as follows:
- Lettuce Corporation Stock = $40 per share
- Carrot Corporation Bond = $245,000
- Radish Corporation Stock = $135 per share
- Cucumber Corporation commercial paper = $990,000
Instructions: Prepare a workpaper properly classifying SubWay, LLC's investments, purchases and sales and the ending balance of each investment. Your paper should also indicate unrealized and realized gains and losses.
Q3. (Consolidation) Pearl Corporation purchased 100% of the net assets of Salt Corporation. Pearl Corporation paid $10,000,000 for net assets having a fair market value of $2,500,000. Pearl Corporation also received unrecorded identifiable intangibles with a value of $1,000,000.
Instructions: Prepare a workpaper that demonstrates the accounting for the above business combination.