Tiger Tech, Inc. is an early-stage privately-held entity that is developing renewable energy technologies. Year 1 At
Question:
Tiger Tech, Inc. is an early-stage privately-held entity that is developing renewable energy
technologies.
Year 1
At the end of Year 1, a group of institutional investors get together and invest in Tiger Tech. As
part of the transaction, Hunter Company invests $15 million for 15,000 Tiger Tech’s common
shares at $1,000 per share. Each outstanding share of Tiger Tech’s common stock entitles its
holder to one vote. At the conclusion of the transaction, Tiger Tech has 100,000 common shares
outstanding and an implied aggregate equity value of $100 million at $1,000 per share. Hunter
holds a 15% interest in Tiger Tech. (Note: Implied aggregate equity valuation for private
companies = Number of common shares outstanding × price per share. It is similar to the
market value for publicly traded companies.)
Year 2
Early in Year 2, because it needs more capital to fund its research and development as well as
marketing efforts, Tiger Tech sells 50,000 newly issued common shares at $1,200 per share to
Dragon, Inc. for $60 million. These common shares have voting rights identical to the existing
Tiger Tech common shares.
Because Tiger Tech common shares are not publicly traded, Hunter’s investment in Tiger Tech
does not have a readily determinable fair value. Therefore, Hunter elects ASC 820-10-35-59,
which permits Hunter to use Tiger Tech’s implied aggregate equity value when estimating the
fair value of the equity investment. For Year 2, Tiger Tech reports a net loss of $18 million.
Tiger Tech does not pay cash dividends.
Year 3
In Year 3, Hunter purchases additional 15,000 Tiger Tech common shares at $1,200 per share
from another early investor. Further, Hunter’s CEO becomes a member on the Board of
Directors at Tiger Tech and participates in the business decision-making processes of Tiger
Tech. For Year 3, Tiger Tech reports a net loss of $15 million. Tiger Tech does not pay cash
dividends.
Year 4
In Year 4, the Federal Reserve rapidly raises interest rates, increasing the risk of an economic
recession and negatively affecting publicly traded technology companies’ stock valuation. Tiger
Tech needs additional funds and sells 10,000 shares of $100 par preferred stock at $1,200 per
share to a group of angle investors (e.g., wealthy individuals). The preferred stock has no voting
power, is not convertible into common stock, but has a liquidation preference. It also carries an 8% cumulative preferred dividend rate. It must be redeemed by Tiger Tech in the event of an initial public offering.
Required:
Answer the following questions related to Hunter’s investment in Tiger Tech. The Fair Value
Adjustment account’s beginning balance in Year 1 on Hunter’s financial statement is zero.
1. Prepare the journal entry for Hunter at the end of Year 1 for its initial investment. What is the
effect of the initial investment on Hunter’s balance sheet, income statement and statement of
cash flows?
2. (1) What is the implied aggregate equity value of Tiger Tech in Year 2 based on its
transaction with Dragon, Inc.? What is the ownership percentage of Hunter in Tiger Tech at
the conclusion of this transaction?
(2) What accounting method should Hunter use to measure its investment in Tiger Tech in
Year 2? Prepare the journal entry for Hunter in Year 2.
3. (1) What is the ownership percentage of Hunter in Tiger Tech at the conclusion of its share
purchase in Year 3?
(2) What accounting method should Hunter use to measure its investment in Tiger Tech in
Year 3? Prepare all necessary journal entries for Hunter in Year 3. Provide the FASB ASC
to support your answer to this question.1
(Hint: Look into ASC Topic 323.)
4. (1) What accounting method should Hunter use to measure its investment in Tiger Tech in
Year 4 after Tiger Tech’s issuance of preferred stock? Provide the FASB ASC to support
your answer to this question.
(2) Do you think Tiger Tech’s equity valuation has increased or decreased in Year 4? Briefly
explain your rationale.
Expert Answer:
1 Year 1 Initial Investment Journal Entry Date Account Debit Credit Year 1 End Investment in Tiger Tech 15000000 Year 1 End Cash 15000000 Effect on St... View the full answer
