Question

On January 1, 20X6, Plus Corporation acquired 90 percent of Side Corporation for $180,000 cash. Side reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Side reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 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 five years. All depreciable assets held by Side at the date of acquisition had a remaining economic life of five years. Plus uses the equity method in accounting for its investment in Side.

1. Based on the preceding information, the increase in the fair value of patents held by Side is:

a. $20,000
b. $25,000
c. $15,000
d. $5,000

2. Based on the preceding information, what balance would Plus report as its investment in Side at January 1, 20X8?

a. $230,400
b. $180,000
c. $234,000
d. $203,400

Answer 1

1) b) $25,000

2) d. $203,400

Step-by-step explanation:

1)

Ref Particulars Amount

a Fair value of entity 200,000

b Total value without patent 175,000

c=a-b Patent 25,000

Therefore, the increase in the fair value of patents held by Side is;

b) $25,000

Fair value of consideration given:

Ref Particulars Amount

Stock 0

Cash 180,000

a Total consideration 180,000

b Stake acquired 90%

c=a/b Fair value of subsidiary 200,000

d=100%-b Minority interest 10%

e=c*d Fair value of minority interest 20,000

On acquisition date

Value of subsidiary without patent

Common stock 100,000

Paid in capital -

Retained earnings 60,000

Fair value adjustment:

Patent -

Equipment 10,000

Land 5,000

Fair value without patent 175,000

2)

Particulars Investment

Acquisition date 180,000

Add: share of net income 54,000

Less: Dividends 18,000

Less: Fair value amortization 12,600

Balance Jan 1, 20X8 203,400

{Share of earnings for 2 years = 30,000 × 2 × 90% = 54,000 }

{Share of dividends for 2 years = 10,000 × 2 × 90% = 18,000 }

{Fair value amortization for 2 years = 7,000 × 90% × 2 = 12,600}

Therefore Balance as at Jan 1, 20X8 is

d) $203,400