Question

On January 1, 2021, Morey, Inc., exchanged $175,225 for 25 percent of Amsterdam Corporation. Morey appropriately applied the equity method to this investment. At January 1, the book values of Amsterdam’s assets and liabilities approximated their fair values.

On June 30, 2021, Morey paid $591,500 for an additional 70 percent of Amsterdam, thus increasing its overall ownership to 95 percent. The price paid for the 70 percent acquisition was proportionate to Amsterdam’s total fair value. At June 30, the carrying amounts of Amsterdam’s assets and liabilities approximated their fair values. Any remaining excess fair value was attributed to goodwill.
Amsterdam reports the following amounts at December 31, 2021 (credit balances shown in parentheses):
Revenues $ (310,000 )
Expenses 155,000 Retained earnings, January 1 (194,900 )
Dividends declared, October 1 10,000 Common stock (500,000 )
Amsterdam’s revenue and expenses were distributed evenly throughout the year, and no changes in Amsterdam’s stock have occurred.
Using the acquisition method, calculate the acquisition-date fair value of Amsterdam to be included in Morey's June 30 consolidated financial statements.
Using the acquisition method, calculate the revaluation gain (or loss) reported by Morey for its 25 percent investment in Amsterdam on June 30.
Using the acquisition method, calculate the amount of goodwill recognized by Morey on its December 31 consolidated balance sheet (assume no impairments have been recognized).
Using the acquisition method, calculate the noncontrolling interest amount reported by Morey on its June 30 and December 31 consolidated balance sheet.

Answer 1

The acquisition-date fair value of Amsterdam is $844,286; the revaluation gain for Morey's 25 percent investment is $35,847; the goodwill recognized on Morey's consolidated balance sheet is $459,825; and the noncontrolling interest amount on the consolidated balance sheet is $42,214.

Step-by-step explanation:

To calculate the acquisition-date fair value of Amsterdam to be included in Morey's June 30 consolidated financial statements, we use the amount Morey paid for the additional 70 percent interest in Amsterdam. Since Morey paid $591,500 for 70 percent, the total fair value is calculated as $591,500 divided by 70% (or 0.7), which equals $844,286 (rounded to the nearest dollar).

To calculate the revaluation gain for Morey's 25 percent investment in Amsterdam on June 30, the fair value attributed to the initial 25 percent ownership is revalued from the initial cost to the proportionate share of the new fair value. Morey initially invested $175,225 for 25 percent. The new fair value proportionate to the 25 percent interest is 25% of $844,286, which equals $211,072. The revaluation gain is $211,072 minus the initial cost of $175,225, resulting in a gain of $35,847.

To calculate the amount of goodwill recognized by Morey on its December 31 consolidated balance sheet, we consider the total acquisition cost ($591,500 + $175,225) and subtract the fair value of the net assets acquired. Assuming the book value of net assets equals their fair value and considering the common stock and retained earnings values provided (ignoring dividends for this calculation), we have a net asset value of $306,900 ($194,900 retained earnings + $500,000 common stock). The total consideration given is $766,725. The goodwill is then $766,725 (total consideration) minus $306,900 (fair value of net assets), which equals $459,825.

For the noncontrolling interest amount on Morey's consolidated balance sheet at both June 30 and December 31, we consider the 5% of Amsterdam not owned by Morey. The fair value of Amsterdam was calculated to be $844,286, hence the fair value of the noncontrolling interest is 5% of $844,286, equaling $42,214 (rounded to the nearest dollar).