Question

1. On January 1, 2018, Pepper Enterprise acquired 80% of Harlan Company’s outstanding common shares in exchange for $5,000,000 in cash.  The priced paid for the 80% ownership interest was proportionately representative of the fair value of all of Harlan’s shares.

          At acquisition date, Harlan’s book value was $5,000,000.  The recorded assets and liabilities had fair values equal to their individual book values except that a building (10-year life) with a book value of $600,000 had an appraised value of $1,000,000.  Also, at acquisition date, Harlan held patents (10-year life) with a fair value of $600,000 that were not recorded on its books.  Any remaining excess fair value was attributed to Goodwill.

          For 2018 Pepper reported net income of $925,000 (before recognition of any income from Harlan) and Harlan separately reported earnings of $275,000.  During 2018, Pepper paid dividends of $185,000 and Harlan paid $125,000 in dividends.

          Compute the amounts that Pepper Enterprises should report in its December 31, 2018 consolidated financial statements for the following items:

1. Harlan’s Patents
2. Harlan’s Building
3. Controlling interest in consolidated Net Income
4. Non-controlling interest in consolidated Net Income
5. Non-controlling interest

Answer 1

Part A

Harlan’s Patents:
Acquisition-date fair value (10 year remaining life)	600000
2018 amortization	(60000)
Patents 12/31/2018	$540000

Part B

Harlan’s building:		1000000
Acquisition-date fair value (10 year remaining life)
2018 depreciation
On Harlan’s books ($600,000 ÷ 10 years)	60000
Depreciation of acquisition-date fair value allocation ($400,000 ÷ 10 years)	40000	(100000)
Building 12/31/2018		$900000

Part C

Controlling interest in combined entity net income:
Pepper Enterprise’s separate net income		925000
Harlan’s reported net income	275000
Excess fair value amortization:
Patents	(60000)
Building (1000000-600000) ÷ 10 years	(40000)
Harlan’s adjusted net income	175000
Pepper’s ownership percentage	80%	140000
Controlling interest in combined entity net income		$1065000

Part D

Noncontrolling interest in Harlan’s net income:
Harlan's reported net income	275000
Excess fair value amortization:
Technology processes	(60000)
Building ($345,000 −$195,000) ÷ 10 years	(40000)
Harlan’s adjusted net income	175000
Noncontrolling interest percentage	20%
Noncontrolling interest in Harlan's net income	$35000

Part E

Acquisition-date balance 1/1/2018
Total Harlan fair value ($5,000,000 ÷ 80%)	6250000
Noncontrolling interest percentage	20%
Noncontrolling interest acquisition-date fair value	1250000
Noncontrolling interest in Harlan’s net income	35000
Noncontrolling interest share of Harlan dividends (20% ×$125000)	(25000)
Noncontrolling interest 12/31/2018	$1260000