Question

On January 1, 20X2, Pint Corporation acquired 80 percent of Size Corporation for $200,000 cash. Size reported net income of $25,000 each year and dividends of $5,000 each year for 20X2, 20X3, and 20X4. On January 1, 20X2, Size reported common stock outstanding of $160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was $50,000. It held land with a book value of $90,000 and a market value of $100,000, and equipment with a book value of $40,000 and a market value of $48,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of eight years. All depreciable assets held by Size at the date of acquisition had a remaining economic life of eight years. Pint uses the equity method in accounting for its investment in Size.

Based on the preceding information, the increase in the fair value of patents held by Size is
A) $10,000
B) $18,000
C) $32,000
D) $50,000

Answer 1

The increase in the fair value of patents held by Size Corporation at the time of acquisition by Pint Corporation is $32,000. This is determined by allocating the total differential between the purchase price and the book value of equity to the adjustments in the fair values of land and equipment before attributing the remainder to patents.

Step-by-step explanation:

The student's question pertains to the computation of the increase in the fair value of patents held by Size Corporation at the acquisition date by Pint Corporation. To calculate this, we identify the total differential between Pint's purchase price and the book value of Size's equity, including the noncontrolling interest's share, and then allocate this differential to the fair value adjustments for land, equipment, and finally patents.

To begin, Pint acquired 80 percent of Size for $200,000, valuing 100 percent at $250,000. Size had a book value of equity (common stock of $160,000 and retained earnings of $40,000) totaling $200,000, indicating a differential of $50,000. The fair value adjustments for land and equipment are $10,000 ($100,000 - $90,000) and $8,000 ($48,000 - $40,000) respectively. After subtracting $18,000 ($10,000 + $8,000) from the total differential of $50,000, we find that the increase in the fair value of patents is $32,000.