Assignment 5: Final Project
Scenario: Roberts Corporation and William Company
On January 1, 2009, Roberts Corporation acquired 40 percent of the outstanding voting stock of William Company in exchange for $600,000 cash. At that time, although William’s book value was $925,000, Roberts assessed William’s total business fair value at $1,500,000.
The book values of William’s individual assets and liabilities approximated their acquisition date fair values except for the equipment account which was undervalued by $350,000. The undervalued equipment had a five-year remaining life at the acquisition date. Any remaining excess fair value was attributed to goodwill. No goodwill impairments have occurred.
During its first year of combined operations, William earned net income of $180,000 and paid dividends totaling $30,000.
Based on the information given above, answer the following questions:
As the chief finance officer (CFO) for Roberts Corporation, draft a memorandum to the president of the company in which you recommend the appropriate accounting and reporting method for the investment in the voting stock of William Company. Since the president of Roberts Corporation does not have a technical accounting background, be sure that you explain the alternatives to accounting for investments in equity securities and your recommended approach in language that he or she can clearly understand. While drafting the memorandum, consider the following:
Use of the equity method is indicated based upon the 40 percent ownership interest. Significant influence normally is assumed when more than 20 percent ownership is held.
Other factors to consider might include:
Is the investee under the control of the courts or other parties as a result of filing for reorganization or entering into liquidation procedures?
Does the investor have representation on the board of directors, or has it attempted to gain representation and been unable to do so?
Has the investee initiated litigation or complaints challenging the investor’s ability to exercise significant influence?
Has the investor signed an agreement surrendering his/her ability to exercise significant influence?
Is majority ownership concentrated in a small group that operates the company without regard of the wishes of the investor?
Is the investor able to acquire the information needed to use equity method reporting?
Qualitative parameters include brevity and clarity.
Prepare all necessary general journal entries for the year ending December 31, 2009 in an excel sheet. Include supporting calculations of all amounts in a separate schedule.
Submit your answers in a three- to four-page Microsoft Word document.
Name your document: SU_MBA6302_W1_A5_LastName_FirstInitial.doc.
Name your journal entries: SU_MBA6302_W1_A5_LastName_FirstInitial.xls.
Submit your document and excel sheet to the W1: Assignment 5 Dropbox by
Saturday, October 12, 2013.
Note: This excel sheet will be used in the subsequent weeks also.
Cite any sources you use using the correct APA format on a separate page.
Assignment 5 Grading Criteria
Maximum Points
Drafted a memorandum to the president of the company, which recommends the appropriate accounting and reporting method for the investment in the voting stock of William Company.20
Identified the key accounting alternatives for investments in equity securities and analyzed the best suited approach for investments.10
Prepared all necessary general journal entries for the year ending December 31, 2009.20
Used correct spelling, grammar, and professional vocabulary. Cited all sources using the correct APA style.5
Total:55