Part I: Prepare your written response in the areas below. Use a separate section to address a separate part of the question.
1. The equity method is the most appropriate method for representing an investment of this type since Big Company acquired Little Company at 100%. The equity method is used when significant influence is excercised; which means that one company holds 20% or more of another company's stock (Baker, Christensen & Cottrell, 2012). Under this method, the investor recognizes income from the investment as the investee earns the income and this investment is reported as one line in the investee's balance sheet (Baker, Christensen & Cottrell, 2012). Income recognized from the investee is reported as one line also on the investor's income statement and this investment represents the investor's share of the investee's net assets (Baker, Christensen & Cottrell, 2012). This income recognized is the investor's share of the invetee's net income (Baker, Christensen & Cottrell, 2012).
2. Asset acquistion is an investment in Little Company by Big Company in the amount of $200,000 acquired at 100% (Baker, Christensen & Cottrell, 2012). The acquistion of Little Company by Big Company for Cash is a debt of investment in Little Company in the amount of $200,000 and a credit in Cash by Big Company (Baker, Christensen & Cottrell, 2012). Common stock is issued as considered in Little Company by Big Company for 10,000 shares in the amount of $25,000 and additional paid in capital in the amount of $175,000(Baker, Christensen & Cottrell, 2012). Elimination entries are used in consolidated worksheets to adjust the totals of the individual account balances of the separate consolidating companies to reflect the amounts that would appear if all legally separate companies were actually a single company (Baker, Christensen & Cottrell, 2012).Goodwill=$40,000 because of the difference between other net assets and investment made by Big Co. (Baker, Christensen & Cottrell, 2012). Goodwill is represented by the fact that Big Co. is paying more than fair value for Little Co.; therefore, Goodwill is recorded by Big Co. in the amount equal to the difference between acquisition amount and fair value of net assets of Little Co. (Baker, Christensen & Cottrell, 2012). Net Assets=$200,000 because Assets($225,000)-Liablities($25,000)=$200,000 (Baker, Christensen & Cottrell, 2012).
3. Assume that Fair Value of all noncash assets are 25% greater than book value. Calculationa are multiplied by 125% for inventory, land, PP&E; except cash (Baker, Christensen & Cottrell, 2012).
4. The consolidation process takes place when two or more companies join together to create a single entity which entails separate financial statements of each company leading to a consolidated statement (Baker, Christensen & Cottrell, 2012). The consolidated worksheet combines all the accounts from both companies (Baker, Christensen & Cottrell, 2012).
Attachment:- Worksheet.xlsx