Often accounting situations are not straightforward. Sometimes the different options available today have repercussions for future options.

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Often accounting situations are not straightforward. Sometimes the different options available today have repercussions for future options. It is important to be aware of the various accounting standards in order to make the best decisions and apply the best method based on the given circumstances.

In this assignment, youll review a scenario outlining a partial acquisition of a new company and apply accounting methods based on the given situation. This assignment will help you complete Project Two, where you will analyze complex accounting situations in the context of a business transaction.

Scenario
You own a successful chocolate company and would like to expand your business and invest in an online candy company. Youve found the perfect company, Online Confections of a Chocoholic. You have reviewed the 10-K report and financial statements. You are satisfied with this choice as an investment. Now, you must decide how much you want to invest in Online Confections of a Chocoholic. You have a choice to own as much as you want to invest.

Once you have decided how much you want to own of Online Confections of a Chocoholic, go ahead and make the purchase. Youll now have to think about journal entries and disclosure statements for your new online-based business.

Directions
Determine how much to invest in this new online candy company. Since this is a fictional company, there are no 10-K reports available. Therefore, you will have to decide on a fictional amount to invest. Use the accounting methods and principles from the Financial Accounting Standards Board (FASB) Accounting Standards Codification and Generally Accepted Accounting Principles (GAAP), linked in the Supporting Materials section, to apply the correct method to the given acquisition and to summarize basic journal entries based on the amount invested.

Specifically, you must address the following rubric criteria:

Rationale

Explain the rationale for the accounting method that would be used to consolidate if you decided to acquire 20% or less of Online Confections of a Chocoholic.
Explain the rationale for the accounting method that would be used to consolidate if you decided to acquire between 20% and 50% of Online Confections of a Chocoholic.
Explain the rationale for the accounting method that would be used to consolidate if you decided to acquire more than 50% of the company.
Journal Entries

Summarize the basic journal entries needed for the current period (at the time of investment) and end of year if 15% of Online Confections of a Chocoholic was purchased. Include the following details in your response:
State the exact dollar amount of the investment.
Note the accounts that should be used in the journal entries.
Use debits and credits appropriately.
Summarize the basic journal entries needed for the current period (at the time of investment) and end of year if 33.3% of Online Confections of a Chocoholic was purchased. Include the following details in your response:
State the exact dollar amount of the investment.
Note the accounts that should be used in the journal entries.
Use debits and credits appropriately.
Summarize the basic journal entries needed for the current period (at the time of investment) and end of year if 75% of Online Confections of a Chocoholic was purchased. Include the following details in your response:
State the exact dollar amount of the investment.
Note the accounts that should be used in the journal entries.
Use debits and credits appropriately.
Disclosure Notes

Explain the types of information that would be included in Online Confections of a Chocoholics disclosure notes.

Sample Solution

Acquisition of Online Confections of a Chocoholic: Accounting Treatment

Investment Decision:

Let’s assume we will invest $3,000,000 in Online Confections of a Chocoholic.

Accounting Method Consolidation:

The appropriate accounting method for consolidation depends on the level of ownership acquired:

  • 20% or Less Ownership (Equity Method): This ownership stake is considered a non-controlling interest. We would account for this investment using the equity method. Here, we record the initial investment at cost and subsequently recognize our share of Online Confections’ profits/losses in our income statement and any dividends received as a reduction in our investment account.
  • Between 20% and 50% Ownership (Significant Influence): This ownership level grants us significant influence over Online Confections’ operations. We would likely use the equity method with modifications. In addition to the equity method steps, we might require adjustments to Online Confections’ financial statements to ensure they align with our accounting policies.
  • More Than 50% Ownership (Controlling Interest): This signifies control over Online Confections. We would fully consolidate Online Confections’ financial statements with our own. This involves combining all assets, liabilities, revenues, and expenses of both companies to present them as a single economic entity.

Journal Entries

Investment of 15% (Equity Method):

  • Current Period:
    • Debit: Investment in Online Confections ($3,000,000 x 15%) = $450,000
    • Credit: Cash $450,000
  • Year-End:
    • Debit: Investment in Online Confections (Our share of Online Confections’ Profit)
    • Credit: Equity Earnings in Online Confections

Investment of 33.3% (Equity Method with Potential Modifications):

  • Current Period:
    • Debit: Investment in Online Confections ($3,000,000 x 33.3%) = $1,000,000
    • Credit: Cash $1,000,000
  • Year-End:
    • Debit: Investment in Online Confections (Our share of Online Confections’ Profit)
    • Credit: Equity Earnings in Online Confections
    • (**Additional entries might be needed depending on the extent of modifications made to Online Confections’ financial statements.)

Investment of 75% (Full Consolidation):

  • Current Period:
    • Debit: Various Asset Accounts (e.g., Inventory, Property, Plant & Equipment)
    • Credit: Investment in Online Confections ($3,000,000)
    • Debit: Liabilities Assumed (e.g., Accounts Payable)
    • Credit: Investment in Online Confections ($3,000,000)
  • Year-End: Consolidated financial statements are prepared, combining all accounts of both companies.

Disclosure Notes

Online Confections of a Chocoholic’s disclosure notes would include information relevant to the investment, such as:

  • Nature and amount of the investment
  • Percentage ownership stake acquired
  • Accounting method used for consolidation (equity or full consolidation)
  • Significant influence (if applicable)
  • Carrying value of the investment
  • Any contingent liabilities assumed

By following these accounting principles and disclosing relevant information, we ensure transparency and a clear understanding of the investment in Online Confections of a Chocoholic.

 

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