You are an accountant at RTB, a private company specializing in software design.

Question

You are an accountant at RTB, a private company specializing in software design. In order to expand the company operations, RTB invested $1 million to purchase 100% of Fleck Company on January 1, 2016. RTB applied the acquisition method for this acquisition and has applied the equity method to account for the investment in the subsidiary. At the time of the acquisition, Fleck Company had the following assets and liabilities;

Cash $100,000

PPE $200,000

Accounts Payable $50,000

Common Stock $250,000

In addition, Fleck Company had an unrecorded patent valued at $200,000 with a 5 year remaining useful life and a customer list valued at $150,000 with a 15 year remaining useful life. When collecting the customer list, Fleck Company agreed not to sell any customer information to third parties. As RTB is a private company, they have elected to use the accounting alternatives presented by the Private Company Council (http://www.fasb.org/pcc). As the accountant for RTB you have identified ASU 2014-02 as well as ASU 2014-18 as relevant pieces of information for this acquisition using the guidance under the Private Company Council. During 2016, Fleck Company recorded net income of $100,000 and paid a dividend of $40,000.

Requirements:

For all of your answers please provide calculations and support from the Accounting Standards Codification or from the Accounting Standards Updates (ASU’s).

1. How much goodwill will be recorded from this acquisition?

2. Prepare the journal entries for the investment in Fleck Company using the equity method for December 31, 2016.

3. Prepare the consolidation worksheet entries for Fleck Company for December 31, 2016.

4. At the start of 2017, RTB is considering another acquisition, will they be required to use the accounting alternative under the private company council?

5. Do you think this approach improves the financial information available to investors and users of the financial statements as opposed to using US GAAP for public companies?

Explanation / Answer

Goodwill recorded would be

Cash of $100,000 + PPE of $200,000 - accounts payable of $50,000 + common stock of $250,000 = $500,00

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