Question

On January 1, 2018, Johnsonville Enterprises, Inc. acquired 80 percent of Stayer Company's outstanding common shares in exchange for $3,000,000 cash. The price paid for the 80 percent ownership interest was proportionately representative of the fair value of all of Stayer's shares. At acquisition date, Stayer's books showed assets of $4,200,000 and liabilities of $1,600,000. The recorded assets and liabilities had fair values equal to their individual book values except that a building (10-year remaining life) with book value of $195,000 had an appraised fair value of $345,000. Stayer's books showed a $175,500 carrying amount for this building at the end of 2018. Also, at acquisition date Stayer possessed unrecorded technology processes (zero book value) with an estimated fair value of $1,000,000 and a 20-year remaining life. For 2018 Johnsonville reported net income of $650,000 (before recognition of Stayer's income), and Stayer separately reported earnings of $350,000. During 2018, Johnsonville declared dividends of $85,000 and Stayer declared $50,000 in dividends. Compute the amounts that Johnsonville Enterprises should report in its December 31, 2018, consolidated financial statements for the following items: a. Stayer's building (net of accumulated depreciation). b. Stayer's technology processes (net of accumulated amortization). C. Net income attributable to the noncontrolling interest d. Net income attributable to controlling interest. e. Noncontrolling interest in Stayer.

Answer 1

For ease, Johnsonville is denoted by J and Strayer company is denoted by J.

1. Amount to be reported for technology processes

At acquisition date, fair value = $ 1,000,000

Remaining life of process = 20 years

Hence, amortization for 2015      = Fair value at acquisition date/Remaining life

                                                                = 1,000,000/20

                                                                = $ 50,000

Amount to be reported on consolidated financial statement = Fair value – Amortization for 2015

                                                                                                                     = $ 1,000,000 – 50,000

                                                                                                                     = $ 950,000                   

2. Amount to be reported for building

At acquisition date, fair value = $ 345,000

Remaining life = 10 years

Depreciation for 2015 = Fair value/Remaining life = 345,000/10 = $ 34,500

Amount to be reported for building in consolidated financial statement

                                                = Fair value at acquisition date – depreciation for 2015

                                                = 345,000 – 34,500

                                                = $ 310,500

3. Net income attributable to controlling interest

Particulars	Details	Amount ($)
Reported earnings of enterprise J		650,000
Reported earnings of S	350,000
Less: Amortisation for tech process	50,000
Adjustment for Building ( 345,000-195,000)/10	15,000
Adjusted earnings for S	285,000
Share of J in S earnings (285,000-80%)	80%	228,000
Net income attributable to controlling interest ( 650,000 + 228,000)		878,000

4. Net income attributable to non-controlling interest

Particulars	Details	Amount ($)
Reported earnings of S		350,000
Less : Excess fair value amortization/depreciation
Technology processes	50,000
Adjustment for Building ( 345,000-195,000)/10	15,000	(65,000)
Adjusted earnings for S		285,000
Non-controlling interest		20%
Net income attributable to non-controlling interest (285,000*20%)		57,000

5. Amount of non-controlling interest

Particulars	Amount ($)
Fair value of S on acquisition date ( 3,000,000/80%)	3,750,000
Non-controlling interest	20%
Fair value of non-controlling interest on acquisition date	750,000
Add: Non-controlling interest in S net income	57,000
Less: non-controlling interest in S dividend ( 50,000 *20%)	10,000
Non-controlling interest to be reported on December 31, 2015	$ 797,000

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