Question

On January 1, 2018, Morey, Inc., exchanged $180,575 for 25 percent of Amsterdam Corporation. Morey appropriately applied the equity method to this investment. At January 1, the book values of Amsterdam’s assets and liabilities approximated their fair values.

On June 30, 2018, Morey paid $605,500 for an additional 70 percent of Amsterdam, thus increasing its overall ownership to 95 percent. The price paid for the 70 percent acquisition was proportionate to Amsterdam’s total fair value. At June 30, the carrying amounts of Amsterdam’s assets and liabilities approximated their fair values. Any remaining excess fair value was attributed to goodwill.

Amsterdam reports the following amounts at December 31, 2018 (credit balances shown in parentheses):

Revenues	$	(291,000	)
Expenses		186,000
Retained earnings, January 1		(237,300	)
Dividends declared, October 1		10,000
Common stock		(500,000	)

Amsterdam’s revenue and expenses were distributed evenly throughout the year and no changes in Amsterdam’s stock have occurred.

1. Using the acquisition method, calculate the acquisition-date fair value of Amsterdam to be included in Morey's June 30 consolidated financial statements.

2. Using the acquisition method, calculate the revaluation gain (or loss) reported by Morey for its 25 percent investment in Amsterdam on June 30.

3. Using the acquisition method, calculate the amount of goodwill recognized by Morey on its December 31 consolidated balance sheet (assume no impairments have been recognized).

4. Using the acquisition method, calculate the noncontrolling interest amount reported by Morey on its June 30 and December 31 consolidated balance sheet.

Answer 1

Answers:

a.) $865,000

b.) Gain of $22,550

c.) No Goodwill

d.) Non-controlling interest = $43,250

Step-by-step explanation

a.)

Using the acquisition method, calculate the acquisition-date fair value of Amsterdam to be included in Morey's June 30 consolidated financial statements.

Fair Value of 70% Acquisition	$605,500
Divided: Percentage of Stock Purchase	70%
FV of Amsterdam	$865,000

b.)

Using the acquisition method, calculate the revaluation gain (or loss) reported by Morey for its 25 percent investment in Amsterdam on June 30.

Cost of 25%	$180,575
Plus: Share in Revenue	$36,375	(291,000 x 25% x 6/12)
Less: Share in Expense	$23,250	(186,000 x 25% x 6/12)
Carrying Amount of 25%	$193,700
FV of 25%	$2,16,250	(865,000 x 25%)
FV is greater than the cost thus there is a gain of	$22,550

c.)

Using the acquisition method, calculate the amount of goodwill recognized by Morey on its December 31 consolidated balance sheet (assume no impairments have been recognized).

No goodwill because the amount paid approximated the fair value of net assets of Amsterdam.

d.)

Using the acquisition method, calculate the noncontrolling interest amount reported by Morey on its June 30 and December 31 consolidated balance sheet.

Non-Controlling interest =  acquisition-date fair value of Amsterdam × Non -controlling interest

= [($865,000 × (100%-95%)]

= [$865,000 × 5%]

= $43,250