Question

On January 1, 2016, Uncle Company purchased 80 percent of Nephew Company's capital stock for $636,000 in cash and other assets. Nephew had a book value of $752,000 and the 20 percent noncontrolling interest fair value was $159,000 on that date. On January 1, 2015, Nephew had acquired 30 percent of Uncle for $336,250. Uncle's appropriately adjusted book value as of that date was $1,087,500. Separate operating income figures (not including investment income) for these two companies follow. In addition, Uncle declares and pays $30,000 in dividends to shareholders each year and Nephew distributes $4,000 annually. Any excess fair-value allocations are amortized over a 10-year period. Year Uncle Company Nephew Company 2016 $ 183,000 $ 43,800 2017 214,000 47,800 2018 243,000 55,200 Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary's income recognized by Uncle in 2018? What is the net income attributable to the noncontrolling interest for 2018?

Answer 1

Solution

Uncle Company

1. Determination of susbsidiary’s income recognized by Uncle in 2018 –

Income recognized by Uncle for 2018 = $40,720

Computations:

Contribution paid by Uncle        $636,000

Noncontrolling interest FV       $159,000

Nephew’s fair value                  $795,000

Nephew’s book value                $752,000

Excess of FV over BV               $43,000

Amortization of excess FV        over 10 years

Annual amortization                  $4,300              (43,000/10)

Income of Nephew 2018            $55,200

Less: amortization                    ($4,300)

Accrual based income               $50,900

Ownership of Uncle                  80%

Income recognized by Uncle      $40,720

Hence, income of Nephew recognized by Uncle in 2018 = $40,720

2. Net income attributable to noncontrolling interest in 2018:

Net income attributable to noncontrolling interest for 2018 = $11,980

Computations:

Nephew’s accrual based income 2018          $50,900

Dividend paid by Uncle to Nephew              $9,000 (30,000 x 30%)

Nephew’s accrual based income including investment income = $59,900

Noncontrolling interest percent        20%

Noncontrolling interest share of Nephew’s Income   $11,980