Company A has only been in existence for two full years as a public company. Prior to this, it was a segment of large multinational and was spun off as stand-alone, public company. It commenced its first year of operations as a public company on January 1, 20X1, and its fiscal year-end is on December 31. also, Company A acquired 100% of the stock of Company B at November 1 20X1 for $200M. Company B has a fiscal year that ends on October 31. At the acquisition date, Company B becomes a fully consolidated subsidiary of Company A.
Company A was issued a qualified audit opinion resulting in a material weakness, by it s external, independent auditors due to a litany of accounting problems as noted below. Company A, has engaged your firm, a CPA advisory firm, to help it navigate the process of evaluating its income statement and balance sheet.
Identify the errors, if any, and determine the correcting entries for below:
1. The acquisition of Company B was financed by Company A with cash and by issuance of 2M common shares for $100M. Company A forgot to record the stock issuance.
2. Company A depreciates equipment using the straight line method. Prior to the acquisition, Company B had not been depreciating some equipment for the eleven calendar months prior to the acquisition. At the acquisition date, that equipment had a Fair Market Value of $10M, a remaining useful life of 5 Yrs, and accumulated depreciation on Company B’s books of $7M with zero residual value. Company A forgot to depreciate the acquired equipment in 20X1 and 20X2. However, Company A believes that it can sell the equipment for $1M for parts at the end of its useful life.
3. At December 15, 20X1, Company A did not recognize a fixed asset impairment of $40Mrelated to factory equipment at one of its overseas facilities . According to the foreign jurisdictions and local industry practice, the local, foreign tax authorities said that it was ok not to impair the equipment since it would not affect the sales quota of the foreign subsidiary.
4. At December 31, 20X1, Company A recognized a $50M impairment expense for Goodwill related to the acquisition of Company B.
5. At Jan 1, 20X2, Company A issued 1,000 bonds and received proceeds of $1,000,000. The Bonds have detachable warrants to purchase 1 share of common stock. One warrant and $1,250 can be exchanged for one share of common stock. The bonds sold for$1,076,395. Common stock par value is $200. The FV of the warrants are $150,000. Half the warrants (500) are exercised on Jan 1, 20X2.
The remainder expire at some later time. Company A made no entries for this transaction