On January 1, 2021, Access IT Company exchanged $1,000,000 for 40 percent of the outstanding voting stock of Net Connect.Especially attractive to Access IT was a research project underway at Net Connect that would enhance both the speed and quantity ofclient-accessible data. Although not recorded in Net Connect's financial records, the fair value of the research project was consideredto be $1,960,000.In contractual agreements with the sole owner of the remaining 60 percent of Net Connect, Access IT was granted (1) various decision-making rights over Net Connect's operating decisions and (2) special service purchase provisions at below-market rates. As a result ofthese contractual agreements, Access IT established itself as the primary beneficiary of Net Connect. Immediately after the purchase,Access IT and Net Connect presented the following balance sheets:(Note: Parentheses indicate credit balances.)Access ITNet Connect61,0001,000,000Cash41,000Investment in Net ConnectCapitalized softwareComputer equipmentCommunications equipment981,000156,0001,066,000916,00056,000336,000191,000PatentTotal assets$ 4,024,000780,000$ (941,000)(2,660,000)Long-term debt(616,000)Common stock-Access ITCommon stock-Net Connect(41,000)Retained earnings(423,000)(123,000)Total liabilities and equity$(4,024,000)(780,000)Each of the above amounts represents a fair value at January 1, 2021. The fair value of the 60 percent of Net Connect shares notowned by Access IT was estimated at $1,500,000.Prepare an acquisition-date consolidation worksheet for Access IT and its variable interest entity. (For accounts where multipleconsolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of theworksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet.Input all amounts as positive values.) Answer is complete but not entirely correct.ACCESS IT COMPANY AND NET CONNECTConsolidation WorksheetAt January 1, 2021Consolidation EntriesConsolidatedNetConnectAccess ITDebitCreditNCIBalancesCashIS61,00041,000102,000Investment in Net Connect1,000,000934,400Capitalized software981,000156,00065,6001,137,000Computer equipment1,066,00056,0001,122,000Communications equipmentResearch and developmentasset916,000336,0001,252,0001,960,0001,960,000Patent191,000191,000Goodwill376,000376,000Total assets$ 4,024,000$ 780,000IS6,140,000Long-term debtCommon stock-Access IT$ (941,000)$ (616,000)$ (1,557,000)(2,660,000)2,660,000Common stock-Net ConnectRetained earningsNoncontrolling interestTotal liabilities and equity(41,000)16,40024,600(423,000)(123,000)49,20073,800(423,000)1,401,600 X1,401,600(1,500,000)$ (780,000)$ 2,401,600$ 2,401,600(820,000)(4,024,000)

Solution : Accounts Access IT ($) Net connect Consolidated entry (Debit ($)) Consolidated…

On January 1, 2021, Access IT Company exchanged $1,000,000 for 40 percent of the outstanding voting stock of Net Connect. Especially attractive to Access IT was a research project underway at Net Connect that would enhance both the speed and quantity of client-accessible data. Although not recorded in Net Connect's financial records, the fair value of the research project was considered to be $1,960,000. In contractual agreements with the sole owner of the remaining 60 percent of Net Connect, Access IT was granted (1) various decision- making rights over Net Connect's operating decisions and (2) special service purchase provisions at below-market rates. As a result of these contractual agreements, Access IT established itself as the primary beneficiary of Net Connect. Immediately after the purchase, Access IT and Net Connect presented the following balance sheets:

On January 1, 2021, Access IT Company exchanged $1,000,000 for 40 percent of the outstanding voting stock of Net Connect. Especially attractive to Access IT was a research project underway at Net Connect that would enhance both the speed and quantity of client-accessible data. Although not recorded in Net Connect's financial records, the fair value of the research project was considered to be $1,960,000. In contractual agreements with the sole owner of the remaining 60 percent of Net Connect, Access IT was granted (1) various decision- making rights over Net Connect's operating decisions and (2) special service purchase provisions at below-market rates. As a result of these contractual agreements, Access IT established itself as the primary beneficiary of Net Connect. Immediately after the purchase, Access IT and Net Connect presented the following balance sheets:

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets And Merger And Acquisition Activity

Section: Chapter Questions

Problem 37RQSC

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