Question

On January 1, 2017, Holland Corporation paid $8 per share to a group of Zeeland Corporation shareholders to acquire 60,000 shares of Zeeland’s outstanding voting stock, representing a 60 percent ownership interest. The remaining 40,000 shares of Zeeland continued to trade in the market close to its recent average of $7.00 per share both before and after the acquisition by Holland. Zeeland’s acquisition date balance sheet follows:

Current assets	$	14,900		Liabilities	$	225,500
Property and equipment (net)		288,900		Common stock		100,000
Patents		201,700		Retained earnings		180,000
	$	505,500			$	505,500

On January 1, 2017, Holland assessed the carrying amount of Zeeland’s equipment (5-year remaining life) to be undervalued by $64,000. Holland also determined that Zeeland possessed unrecorded patents (10-year remaining life) worth $345,200. Zeeland’s acquisition-date fair values for its current assets and liabilities were equal to their carrying amounts. Any remaining excess of Zeeland’s acquisition-date fair value over its book value was attributed to goodwill.

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

	Holland				Zeeland
Sales	$	(745,800	)		$	(437,500	)
Cost of goods sold		378,100				204,500
Depreciation expense		93,500				33,100
Amortization expense		14,900				20,100
Other operating expenses		55,600				60,800
Equity in Zeeland earnings		(43,008	)			0
Separate company net income	$	(246,708	)		$	(119,000	)
Retained earnings 1/1	$	(821,100	)		$	(320,800	)
Net income		(246,708	)			(119,000	)
Dividends declared		50,000				30,000
Retained earnings 12/31	$	(1,017,808	)		$	(409,800	)
Current assets	$	125,900			$	90,500
Investment in Zeeland		561,096				0
Property and equipment (net)		846,000				268,000
Patents		150,800				156,500
Total assets	$	1,683,796			$	515,000
Liabilities	$	(345,988	)		$	(5,200	)
Common stock - Holland		(320,000	)			0
Common stock - Zeeland		0				(100,000	)
Retained earnings 12/31		(1,017,808	)			(409,800	)
Total liabilities and owners equity	$	(1,683,796	)		$	(515,000	)

At year-end, there were no intra-entity receivables or payables.

1. Compute the amount of goodwill recognized in Holland’s acquisition of Zeeland and the allocation of goodwill to the controlling and noncontrolling interest.

2. Show how Holland determined its December 31, 2018, Investment in Zeeland account balance.

3. Prepare a worksheet to determine the amounts that should appear on Holland’s December 31, 2018, consolidated financial statements.

Answer 1

Calculation of Purchase Consideration given by Holland Corporation to Zeeland Corporation.

As Holland Corporation Paid $ 8 per share for 60,000 shares of Zeeland Corporation.

Total Purchase Consideration = 60,000 Shares * $ 8 = $ 4,80,000

We will learn to calculate Goodwill step by step

Step 1 – Find the Book Value of Assets

Current Assets	$14,900	Liabilities	$225,500
Property & Equipment	$288,900	Common Stock	$100,000
Patents	$201,700	Retained Earnings	$180,000
	$505,500		$505,500

Step 2 – Find the Fair Value of Assets

Current Assets	$14,900
Property & Equipment	$224,900
Patents	$546,900
Liabilities	-$225,500
Net Assets	$561,200

Goodwill = Net Identifiable Assets - Consideration

= $ 561,200 - $ 480,000

= $ 81,200

Goodwill allocation

When the parent doesn’t acquire all of the subsidiary’s outstanding common stock, some portion of the subsidiary’s ownership rests with outside investors called minority shareholders. The stake of outside investors in a subsidiary is called non-controlling interest (also called minority interest).

When non-controlling interest (NCI) exists, the goodwill arising on acquisition must be allocated between the parent and the NCI. The allocation depends on whether the fair value of purchase consideration and fair value non-controlling interest at the acquisition date were based on the same price per share of the common stock. If the fair value of purchase consideration (paid by the parent) and fair value of the non-controlling interest are based on the same share price, goodwill is allocated proportionately. However, where the majority stake is valued at a relatively higher price (i.e. the price paid per share by the parent is higher than the price paid by minority shareholders) due to existence of control premium, the allocation of goodwill is not proportionate. Where control premium exists, the additional goodwill resulting from premium is allocated solely to the parent and the amount of goodwill allocated to subsidiary is the same as if no control premium existed