Question

Nascent, Inc., acquires 60 percent of Sea-Breeze Corporation for $414,000 cash on January 1, 2015. The remaining 40 percent of the Sea-Breeze shares traded near a total value of $276,000 both before and after the acquisition date. On January 1, 2015 Sea-Breeze had the following assets and liabilities:

	Book Value				Fair Value
Current assets	$	150,000			$	150,000
Land		200,000				200,000
Buildings (net) (6-year remaining life)		300,000				360,000
Equipment (net) (4-year remaining life)		300,000				280,000
Patent (10-year remaining life)		0				100,000
Liabilities		(400,000	)			(400,000	)

The companies’ financial statements for the year ending December 31, 2018, follow:

	Nascent				Sea-Breeze
Revenues	$	(600,000	)		$	(300,000	)
Operating expenses		410,000				210,000
Investment income		(42,000	)			0
Net income	$	(232,000	)		$	(90,000	)
Retained earnings, 1/1/18	$	(700,000	)		$	(300,000	)
Net income		(232,000	)			(90,000	)
Dividends declared		92,000				70,000
Retained earnings, 12/31/18	$	(840,000	)		$	(320,000	)
Current assets	$	330,000			$	100,000
Land		220,000				200,000
Buildings (net)		700,000				200,000
Equipment (net)		400,000				500,000
Investment in Sea-Breeze		414,000				0
Total assets	$	2,064,000			$	1,000,000
Liabilities	$	(500,000	)		$	(200,000	)
Common stock		(724,000	)			(480,000	)
Retained earnings, 12/31/18		(840,000	)			(320,000	)
Total liabilities and equities	$	(2,064,000	)		$	(1,000,000	)

2. What is the annual excess amortization initially recognized in connection with this acquisition?

3. If the parent had applied the equity method, what investment income would the parent have recorded in 2018?

4. What amount should the parent report as retained earnings in its January 1, 2018, consolidated balance sheet?

5. What is consolidated net income for 2018 and what amounts are attributable to the controlling and noncontrolling interests?

6. Within consolidated statements at January 1, 2015, what balance is included for the subsidiary’s Buildings account?

7. What is the consolidated Buildings reported balance as of December 31, 2018?

Answer 1

ANSWER

PART B

Consideration transferred in acquisition........ $414,000

      Noncontrolling interest fair value...............     276,000

      Sea-Breeze fair value 1/1/18 ........................ $690,000

      Sea-Breeze book value 1/1/18   550,000

      Excess fair value over book value                $140,000                                         

      Excess fair assignments:

            Buildings 60,000/6 $10,000

            Equipment (20,000) /4 (5,000)

            Patent 100,000 /10     10,000

            Total   $15,000

PART C

60%*(subsidiary's income - excess fair value amortization)

60%*(90000-15000) = 45000

Investment Income = 45000

PART D

Increase in book value during prior years
($780,000 – $550,000) $230,000

      Less excess amortization (45,000)

      Net increase in book value $185,000

      Ownership 60%

      Increase required in parent's retained earnings, 1/1/18 $111,000

      Parent's retained earnings, 1/1/18 as reported    700,000

Parent’s share of consolidated retained earnings, 1/1/18 $811,000

PART E

Consolidated net income and allocation

Revenues (add book values)                                                          $900,000

Expenses (add book values and excess amortization)            (635,000)

Consolidated net Income                                                                 $265,000

Noncontrolling interest in consolidated net income

            ($90,000 – 15,000) × 40%   30,000

Controlling interest in consolidated net income                       $235,000

PART F

Consolidated buildings 1/1/18

Book value $300,000

Acquisition-date fair-value allocation    60,000

Consolidation figure $360,000

PART G

Consolidated buildings, 12/31/18:

           Parent's book value $700,000

           Subsidiary's book value 200,000

            Original allocation 60,000

            Amortization ($10,000 × 4 years) (40,000)

            Consolidated balance $920,000

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