Question

Assume that prior to January 1, 2019, a Reporting Company owned a 15 percent interest in a Legal Entity. The Reporting Company acquired its 15 percent ownership interest in the Legal Entity on June 15, 1998 for $45,000, and correctly accounted for this investment under the cost method (i. E. , it was a passive investment and it was not marketable). On January 1, 2019, the Reporting Company purchased an additional 30 percent interest in the Legal Entity for $180,000. As a result of an evaluation of the facts and circumstances on Janu-ary 1, 2019, the Reporting Entity determined that the Legal Entity is a variable interest entity (VIE) and that the Reporting Company is the primary beneficiary of the VIE. The Reporting Company also determined that, on January 1, 2019, the fair value of the previously held 15 percent interest is $90,000. In addition, in-dependent appraisals revealed that the fair value of the noncontrolling interest (i. E. , the 55 percent not owned by the Reporting Company) is $330,000. On January 1, 2019, the Legal Entity has reported book values for its identifiable net assets equal to $399,000 and fair values for its identifiable net assets equal to $570,000.

Assume that the Legal Entity is not a "business," as that term is defined in FASB ASC 805 ("Business Combinations"). Related to the initial consolidation of the Legal Entity on January 1, 2019, determine the following amounts:


Note: Use a negative sign with your answer in part b. To indicate a gain on initial consolidation of Legal Entity, if applicable.


Account


Amount


a. Goodwill Answer


b. (Gain) Loss on initialconsolidation of Legal Entity Answer

Answer 1

The goodwill is $171,000 and the (gain) loss on initial consolidation is -$45,000.

Step-by-step explanation:

When a Reporting Company acquires an additional interest in a Legal Entity and becomes the primary beneficiary of a Variable Interest Entity (VIE), it must consolidate the VIE into its financial statements. To determine the amounts related to the initial consolidation of the Legal Entity, we need to calculate the goodwill and (gain) loss on initial consolidation:

a. Goodwill:

The goodwill is calculated as the difference between the fair value of the Legal Entity minus the fair value of its identifiable net assets. In this case, the fair value of the Legal Entity is $570,000 and the fair value of its identifiable net assets is $399,000. Therefore, the goodwill is $171,000 ($570,000 - $399,000).

b. (Gain) Loss on initial consolidation of Legal Entity:

The (gain) loss on initial consolidation is determined by comparing the fair value of the previously held interest in the Legal Entity ($90,000) to its carrying amount ($45,000). In this case, there is a gain of $45,000 ($90,000 - $45,000). Since the gain is positive, the answer is a loss with a negative sign: -$45,000.

Answer 2

The goodwill in the initial consolidation of the Legal Entity is $171,000, and the gain on consolidation is -$345,000.

Step-by-step explanation:

According to the given information, the Reporting Company owned a 15% interest in the Legal Entity before January 1, 2019. On that date, the Reporting Company acquired an additional 30% interest in the Legal Entity. The fair value of the previously held 15% interest is $90,000, and the fair value of the noncontrolling interest is $330,000. The Legal Entity reported book values for its identifiable net assets of $399,000 and fair values of $570,000.

a. The goodwill is calculated by subtracting the fair value of the identifiable net assets from the total fair value of the Legal Entity. Therefore, the goodwill is $570,000 - $399,000 = $171,000.

b. The loss on initial consolidation of the Legal Entity is calculated by subtracting the cost of the previously held 15% interest and the additional purchase price from the fair value of the Legal Entity. Therefore, the loss is $45,000 + $180,000 - $570,000 = -$345,000. (Note: A negative sign indicates a gain.)