Question

On January 1, 2022, Paulson Corporation purchased 65% of the outstanding common stock of Sun Company, which became a subsidiary of Paulson. No goodwill was reported on this acquisition. Differences between book value and fair value of the net identifiable assets of Sun Company on January 1, 2022, were limited to the following: Book value Fair value Inventories (FIFO) $ 19,000 $ 18,500 Building (net) [remaining life: 5 years; straight-line depreciation; no salvage value] 45,000 40,000 Sun’s cost of goods sold was $38,000 in 2022. Sun reported an income of 20,000 in 2023. The noncontrolling interest in net income for the year ended December 31, 2023 (second year after business combination) was

a. $7,350
b. $7,175
c. $6,825
d. $6,650

Answer 1

The correct answer for the noncontrolling interest in Sun Company's net income for 2023 is $6,650. This is calculated by taking 35% of the reported income of $20,000 and subtracting 35% of the additional $1,000 depreciation expense from the fair value adjustment of the building.

Step-by-step explanation:

The noncontrolling interest in Sun Company's net income for the year ended December 31, 2023, can be calculated by first determining Sun Company's net income attributable to noncontrolling interest. Since Paulson Corporation owns 65% of Sun, the noncontrolling interest represents 35% of Sun. Sun reported an income of $20,000 in 2023. Therefore, the noncontrolling interest's share of net income is 35% of $20,000, which equals $7,000.

However, we must consider the fair value adjustments for the inventory and building as well. Since the fair value of inventory is lower by $500 (i.e., $19,000 - $18,500), this would have increased COGS and reduced the income in 2022, which is before the current year being considered. As such, it would not affect the 2023 noncontrolling interest calculation. The building's fair value adjustment is $5,000 lower ($45,000 - $40,000), and it is depreciated over 5 years, so the depreciation expense is increased by $1,000 per year. This additional depreciation reduces Sun's 2023 income by $1,000, hence reducing the noncontrolling interest's share of net income by 35% of $1,000, which is $350. Therefore, the noncontrolling interest's share of net income after adjusting for the building's additional depreciation is $7,000 - $350 = $6,650.