VPI, Inc. is a manufacturer of high-end boutique clothing. The company purchases pre-sewn clothing and employees a team
Posted: Wed May 04, 2022 4:27 pm
VPI, Inc. is a manufacturer of high-end boutique clothing. The
company purchases pre-sewn clothing and employees a team of artists
who add decorative stitching, beading, and other accents. The
business has been in the Virgil family for over 50 years. It was
originally founded by James Virgil, but is now run by his three
grandchildren, Virginia, Paul, and Irene. The business had been a
closely held private corporation, but wanting to expand the
business, the grandchildren took the company public in late 2020.
Prior to going public the company had prepared cash basis financial
statements, but were required to start preparing GAAP basis
financial statements starting as of January 1, 2021. The accounting
staff are now working on preparing the annual 2021 financial
statements. VPI, Inc. hired a new controller, Maggie Miller, late
in the year of 2021 to help with the transition to GAAP based
statements and to help in dealing with the more complicated
transactions that the company has engaged in as part of the
business expansion plans. Maggie has reviewed the 2021 financial
statements and has noted the following potential issues. VPI, Inc
is subject to a 21% federal income tax rate
VPI, Inc. bought 20,000 shares (a 19% interest) of the voting
stock of CBD, Inc. on 9/1 for $750,000 ($37.50/share). ABC, Inc.
manufacturers high end jewelry and handbags and is headquartered in
the same city as VPI, Inc. The companies don’t do business with
each other, but because of their similarities, Virginia, who serves
as the president of VPI, Inc., has become well acquainted with the
management of ABC, Inc. Since VPI, Inc has less than a 20% interest
in ABC, Inc, the accountants determined that VPI, Inc did not have
significant influence over ABC, Inc. When Maggie did her review,
she noted that Virginia currently sits on the board of ABC, Inc.
and that no other investor in ABC, Inc. holds more than a 10%
voting interest. This makes Maggie wonder whether VPI, Inc. has
significant influence over ABC, Inc. ABC, Inc.’s stock was trading
at $40/share on 12/31. ABC recorded net income of $1,871,576 for
the current year and paid a $0.50/share dividend on 12/31 (date of
record on the dividend was 9/15).
Question: What entries would have been made if the
accountants at VPI, Inc. had initially decided that VPI, Inc. had
significant influence over ABC, Inc.?
company purchases pre-sewn clothing and employees a team of artists
who add decorative stitching, beading, and other accents. The
business has been in the Virgil family for over 50 years. It was
originally founded by James Virgil, but is now run by his three
grandchildren, Virginia, Paul, and Irene. The business had been a
closely held private corporation, but wanting to expand the
business, the grandchildren took the company public in late 2020.
Prior to going public the company had prepared cash basis financial
statements, but were required to start preparing GAAP basis
financial statements starting as of January 1, 2021. The accounting
staff are now working on preparing the annual 2021 financial
statements. VPI, Inc. hired a new controller, Maggie Miller, late
in the year of 2021 to help with the transition to GAAP based
statements and to help in dealing with the more complicated
transactions that the company has engaged in as part of the
business expansion plans. Maggie has reviewed the 2021 financial
statements and has noted the following potential issues. VPI, Inc
is subject to a 21% federal income tax rate
VPI, Inc. bought 20,000 shares (a 19% interest) of the voting
stock of CBD, Inc. on 9/1 for $750,000 ($37.50/share). ABC, Inc.
manufacturers high end jewelry and handbags and is headquartered in
the same city as VPI, Inc. The companies don’t do business with
each other, but because of their similarities, Virginia, who serves
as the president of VPI, Inc., has become well acquainted with the
management of ABC, Inc. Since VPI, Inc has less than a 20% interest
in ABC, Inc, the accountants determined that VPI, Inc did not have
significant influence over ABC, Inc. When Maggie did her review,
she noted that Virginia currently sits on the board of ABC, Inc.
and that no other investor in ABC, Inc. holds more than a 10%
voting interest. This makes Maggie wonder whether VPI, Inc. has
significant influence over ABC, Inc. ABC, Inc.’s stock was trading
at $40/share on 12/31. ABC recorded net income of $1,871,576 for
the current year and paid a $0.50/share dividend on 12/31 (date of
record on the dividend was 9/15).
Question: What entries would have been made if the
accountants at VPI, Inc. had initially decided that VPI, Inc. had
significant influence over ABC, Inc.?