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

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.

Step by Step Solution

★★★★★

3.40 Rating (163 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

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 full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...

Read the case study and answer the question below with a one page response. What does a SWOT analysis reveal about the overall attractiveness of Under Armours situation? Founded in 1996 by former...

Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...

Q No. 1) a) Construct the Histogram for the following frequency distribution relating to the ages of telephone operators. Age (Years) No. of Operators 10-15 15-20 20-25 25-30 30--35 10 22 17 b)...

According to the conclusion to Chapter 4, . . . property rights are part of the law that makes owners internalize the social costs and benefits of alternative uses of the goods that they own. Torts...

If the writer were to delete the phrase With tomatoes so readily available during the growing season from the preceding sentence, the paragraph would primarily lose: F. A detail that more fully...

One hundred items are simultaneously put on a life test. Suppose the lifetimes of the individual items are independent exponential random variables with mean 200 hours. The test will end when there...

The Dallas Mavericks basketball team has hired you as its new accountant. On your first day on the job, Mavericks owner, Mark Cuban, comes to you and asks, How many tickets must we sell to pay for...

Network Solutions just introduced a new, fully automated manufacturing plant that produces 2,500 wireless routers per day with materials costs of $55 per router and no other costs. The average number...

Consider the situation where you just received $10,000 pre-tax income this year and you are considering whether you should contribute part of the money to IRA or an annuity account, or just put the...

Select all that apply Which of the following examples are claims of policy? Multiple select question. The school board should not allow the elementary school to cut the art program. Devonte is a...

Simple expected value calculations are at the heart of Kahneman and Tversky's prospect theory. Calculate the expected value of the following gamble. You are playing the following game: draw a card...

From the following data prepare a statement of cost of goods manufactured and cost of goods sold of Popular Stoves Manufacturing Co. for the year 2011: Rs. Stock of materials on 1-1-201135,000 Stock...

Reflect on your learning experience and course resources and answering the following. Note that this is not a research project and would expect either your personal thoughts or SYST 3 0 0 2...

1. What does your company produce? 2. Analyze the trends in sales, cost of goods sold, gross profit, and operating income for your manufacturing company. Prepare a trend analysis for percentage...

1. Find and describe a real-world example of a method for enhancing the bond strength between different phases of a composite. Include the materials system, the details of the technique being used...

(Net present value calculation)Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $9,000,000 on new service equipment...

What is the difference between the straight-line method of depreciation and the written down value method? Which method is more appropriate for reporting earnings?

Nici Limited (NL) is a Canadian public company that operates in the swimsuit industry. They design, develop, and manufacture swimsuits that are then sold to retail stores across Canada. In the past,...

Skuttle Inc. buys 200 shares of Berke Inc. on March 1, 2013, for $4.20 per share. Skuttle Inc. incurs transaction costs of $120. At December 31, 2013, the market price is $5.10 per share. Skuttle...

A company bought a machine for U.S. $50,000 on January 1, 2013. The machine is to be delivered in one week and is payable upon receipt of the machine. The company has not yet paid for the machine. It...

Calculate the missing quantities four-figure accuracy.

If the C$ appreciates (from the value in Table 3.2) by C$0.0017 relative to the , what will be the new value for per C$1.00?