Question

On January 1, Year 1, Parent purchased 70% of Sub's outstanding stock for $420,000. The non controlling interest's acquisition date fair value is assessed at $174,000. On the acquisition date, reported retained earnings of $180,000. Sub had land which was undervalued on its books by $10,000 and a pa undervalued by $24,000 (5 year life). During Year 1 Sub's net income (earned evenly throughout the year) totaled $96,000 and it declared and paid dividends of $6,000 each quarter. A. Prepare an Analysis of Purchase Price on the date of acquisition. B. Assume the acquisition occurred on May 1 instead of January 1. Prepare an Analysis of Purchase Price.

Answer 1

A parent company is one which owns more than 51% of the total stock of another company which is called the subsidiary company, and such parent company has the voting right and can appoint the members of the board of directors of the subsidiary, where-as,

Subsidiary company is the one whose more than 51 % of the total number of shares are held by another company who has the voting right and can appoint the members of the board.

Accounting at the time of acquisition:-

1. Stock - As per the question the term stock is referred to as shares.
2. Non-controlling interest means when business combination in which the parent acquires less than 100% of the subsidiary. Acquisition method requires the parent to present consolidated financial statements i.e. financial statements which combine total assets and liabilities of the parents with total assets and liabilities of the subsidiary. But because not all assets and liabilities belong to the parent, the shareholders equity section is bifurcated into net assets that belong to the parent and net assets that belong to the other minority shareholders.

Now the method of calculating purchase price on the date of acquisition is as per below:-

NCI (non controlling interest) share of opening net assets of subsidiary	P × NA
Add: NCI share of unamortized fair value differential	P × FVD
Add: net income attributable to NCI	P × SI
Less: dividends paid to non-controlling shareholders	P × D
Non-controlling interest at the date of consolidation or purchase price on the date of acquisation	PP

Where P is the proportionate ownership of minority shareholders. FV is the fair value of net identifiable assets of the subsidiary at acquisition date, RE is opening retained earnings of the subsidiary, FVD is the accumulated amortization of fair value differential, UFVD is the un-amortized fair value differential, SI is subsidiary income, NA is the book value of net assets at the start of the consolidation period, D is total dividends declared during the period. AND, PP is the purchase price on the date of acquisition.

Answer to question A) Substituting the values given in the question in the above table when the date of acquisition is 1^st Jan

Amount (USD) Particulars ANCI in fair value of subsidiary's net assets at acquisition date B Add: NCI share in opening retained earnings since acquisition cTotal (A+B) D Less: NCI share of any cumulative fair value amortization E TOTAL (C-D) F Add: net income attributable to NCI G Total (E+F) H|Less: dividends paid to non-controlling shareholders Purchase Price on the date of acquisation (G-H) Workings 174,000.00 174,000 usd 54,000.00 30% X 180,000 USD 228,000.00 (4,350.00) 30% X 174,000USD X 1/12 223,650.00 28,800.00 30% X 96,000USD 252,450.00 (7,200.00) 30% X 24,000 USD 245,250.00

Answer to question B) Substituting the values given in the question in the above table when the date of acquisition is 1^st May

Amount (USD) Particulars ANCI in fair value of subsidiary's net assets at acquisition date B Add: NCI share in opening retained earnings since acquisition Total (A+B) D Less: NCI share of any cumulative fair value amortization E TOTAL (C-D) F Add: net income attributable to NCI GTotal (E+F) H|Less: dividends paid to non-controlling shareholders Purchase Price on the date of acquisation (G-H) Workings 174,000.00 174,000 usd 54,000.00 30% X 180,000 USD 228,000.00 (34,800.00) 30% X 174,000USD X 8/12 193,200.00 28,800.00 30% X 96,000USD 222,000.00 (4,800.00) 30% X 24,000 USD x 8/12 217,200.00