Big Co. recently made the following acquisitions: a) Big Co. acquired 1,000 shares of voting stock in

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Question:

Big Co. recently made the following acquisitions:

a) Big Co. acquired 1,000 shares of voting stock in Little Co. for $100,000 cash. Little Co. currently has 10,000 shares of voting stock issued and outstanding. Little Co.’s share are trading on the New York stock exchange at $115 per share. Big Co. subsequently receives a dividend of $.20mper share from Little Co.

b) Big Co. acquired 3,000 shares of voting stock in Small Co. for $300,000 cash. Small Co. currently has 10,000 shares of voting stock issued and outstanding. Big Co. subsequently receives a dividend of $.10 per share from Small Co. During the year, Small Co. had net income of $500,000, and sold $100,000 of inventory to Big Co. Small Co. applies a 15% markup on its inventory. At the end of the year, Big Co. has $20,000 remaining in inventory.

c) Big Co. acquired all of the outstanding shares of voting stock in Tiny Co. for $1,000,000 on January 1, 2013. The fair market value of Tiny’s stock at acquisition was $800,000.

1) Determine and provide the proper accounting method for Big Co.’s investment in each of these three companies described above. Provide reasons for your answer.

2) Prepare the basic journal entries under the proper accounting method to record Big Co.’s investment in Little Co. and Small Co. based on the facts provided.

3) The CFO of Big Co., has asked for a summary of how to properly account for the acquisition of Tiny Co. From you, his external auditor.

Prepare a professional, business quality memorandum to the CFO outlining the proper accounting for this acquisition. Review the standards relating to business combinations on the FASB codification’s website to be sure you relate all the necessary facts on the CFO.

Areas this memorandum should cover include: which method to use, changes in accounting treatment from prior acquisitions, goodwill, financial statement presentation and possible eliminations between the companies.