Good afternoon, I'm studying for one of my exams, and I cannot figure out where the solution manual is getting a number. Within the solution below they take 15,000 dollars out of 2012 equity income as "amortization of equity income." I would really appreciate an explanation as to why they are doing this and how they came up with the 15,000, I've reread the chapter and this is not mentioned. Thanks in advance.
I have attached pictures of the solution as well since it didn't translate well into the forums. There is a T account in the first picture which I left out out of the typed solution.
A 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2011. The capital stock balance of Saxton Corp. was $3,000,000 on this date and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.
The balance sheet information available for Saxton Corp on the acquisition date revealed these values:
Inventory (FIFO):
The equipment was determined to have a 15 year useful life when purchased at the beginning of 2006. Saxton Corporation reported net income in 2011 of $250,000 and $300,000 in 2012. No dividends were declared in either of those years.
A. Prepare the worksheet entries, assuming that the complete equity method is used to account for the investment, to eliminate the investment account, and to allocate and depreciate the difference between book value and the value implied by the purchase price in the 2012 consolidated statements work paper.
Solution
Computation and Allocation of Difference Schedule
Parent Share:
Purchase price and implied value: $3,750,000
Less: Book value of equity acquired 3,600,000 (4,000,000*.9)
Difference between implied and book value 150,000 (166,667*.9)
Inventory (90,000) (100,000*.9)
Land (360,000) (400,000*.9)
Balance (excess of FV over implied value) (300,000) (333,333*.9)
Gain 300,000
Balance -0-
Non-Controlling interest share:
Purchase price and implied value: 416,667
Less: Book value of equity acquired:400,000 166,667
Inventory: (10,000)
Land : (40,000)
Balance (excess of FV over implied value): (33,333)
Increase Noncontrolling interest to fair value of assets: 33,333
Balance: -0-
Entire Value:
Purchase price and implied value: 4,166,667 *
Less: Book value of equity acquired: 4,000,000
Difference between implied and book value: 166,667
Inventory: (100,000)
Land: (400,000)
Balance (excess of FV over implied value): (333,333)
Total allocated bargain 333,333
Balance:-0-
*$3,750,000/.90
(1) Equity in Subsidiary Income 255,000
(2) Beginning Retained Earnings-Saxton Co. 1,250,000
Capital Stock- Saxton Co. 3,000,000
Difference between Implied and Book Value 166,667
(3) Investment in Saxton Co. 90,000
Noncontrolling Interest 10,000
Land 400,000
I have attached pictures of the solution as well since it didn't translate well into the forums. There is a T account in the first picture which I left out out of the typed solution.
A 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2011. The capital stock balance of Saxton Corp. was $3,000,000 on this date and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.
The balance sheet information available for Saxton Corp on the acquisition date revealed these values:
Inventory (FIFO):
Book Value $700,000
Fair Value $800,000
Equipment (net): Book Value $2,000,000
Fair Value $2,000,000
Land: Book Value $1,600,000
Fair Value $2,000,000
The equipment was determined to have a 15 year useful life when purchased at the beginning of 2006. Saxton Corporation reported net income in 2011 of $250,000 and $300,000 in 2012. No dividends were declared in either of those years.
A. Prepare the worksheet entries, assuming that the complete equity method is used to account for the investment, to eliminate the investment account, and to allocate and depreciate the difference between book value and the value implied by the purchase price in the 2012 consolidated statements work paper.
Solution
Computation and Allocation of Difference Schedule
Parent Share:
Purchase price and implied value: $3,750,000
Less: Book value of equity acquired 3,600,000 (4,000,000*.9)
Difference between implied and book value 150,000 (166,667*.9)
Inventory (90,000) (100,000*.9)
Land (360,000) (400,000*.9)
Balance (excess of FV over implied value) (300,000) (333,333*.9)
Gain 300,000
Balance -0-
Non-Controlling interest share:
Purchase price and implied value: 416,667
Less: Book value of equity acquired:400,000 166,667
Inventory: (10,000)
Land : (40,000)
Balance (excess of FV over implied value): (33,333)
Increase Noncontrolling interest to fair value of assets: 33,333
Balance: -0-
Entire Value:
Purchase price and implied value: 4,166,667 *
Less: Book value of equity acquired: 4,000,000
Difference between implied and book value: 166,667
Inventory: (100,000)
Land: (400,000)
Balance (excess of FV over implied value): (333,333)
Total allocated bargain 333,333
Balance:-0-
*$3,750,000/.90
(1) Equity in Subsidiary Income 255,000
Investment in Saxton Corporation. 255,000
To eliminate subsidiary income ((.90)($300,000) - $15,000)(2) Beginning Retained Earnings-Saxton Co. 1,250,000
Capital Stock- Saxton Co. 3,000,000
Difference between Implied and Book Value 166,667
Investment in Saxton Co. 3,975,000
Noncontrolling Interest [$416,667 + ($1,250,000 – 1,000,000) x .10] 441,667
To eliminate the investment amount and create noncontrolling interest account (3) Investment in Saxton Co. 90,000
Noncontrolling Interest 10,000
Land 400,000
Difference between Implied and Book Value 166,667
Beginning Retained Earnings-P (gain on acquisition) 300,000
Noncontrolling Interest 33,333
To allocate and depreciate the difference between implied and book value
