Question

On 1/1/2016, XYZ Corporation purchased 75% of the outstanding voting stock of Sally Corporation for $2,400,000 paid in cash.  On the date of the acquisition, Sally’s shareholders’ equity consisted of the following:

Common stock, $10 par                 $1,000,000

APIC                                                   600,000

Retained Earnings                               800,000

Total SE                                         $2,400,000

The excess fair value of the net assets acquired was assigned 10% to undervalued Inventory (sold in 2016), 40% to undervalued PPE assets with a remaining useful life of 8 years, and 50% to Goodwill.

Comparative trial balances of XYZ Corporation and Sally Corporation at December 31, 2020, are as follows:

	California	San Diego
Other assets – net	3,765,000	2,600,000
Investment in Sally	2,340,000	-
Expenses (including cost of sales)	3,185,000	600,000
Dividends	500,000	200,000
	9,790,000	3,400,000
Common Stock, $10 par value	(3,000,000)	(1,000,000)
APIC	(850,000)	(600,000)
Retained earnings	(1,670,000)	(800,000)
Sales revenues	(4,000,000)	(1,000,000)
Income from Sally	(270,000)	-
	(9,790,000)	(3,400,000)

Required:

Determine the amounts that would appear in the consolidated financial statements of XYZ Corporation and its subsidiary for each of the following items:

1. Goodwill at December 31, 2020. (2 points)
2. Income to Non-controlling interest for 2020. (3 points)
3. Consolidated retained earnings at December 31, 2019. (2 points)
4. Consolidated retained earnings at December 31, 2020. (2 points)
5. Controlling share of consolidated Net Income for 2020. (3 points)
6. Non-controlling interest at December 31, 2020. (3 points)

Answer 1

1. Goodwill 2020 = 50% of excess of fair value over book value = 50%*(($2,400,000/75%)-$2,400,000) = $400,000
2. Income in Non-controlling interest for 2020

Particulars	Amount
net income	$400,000
Less: amortization of excess
Plant assets	($40,000)
Adjusted income	$360,000
25% share ($360,000*25%)	$90,000

Therefore, Income in Non-controlling interest for 2020 = $90,000

3. Consolidated retained earnings at December 31, 2019 = $1,670,000

4, Consolidated retained earnings at December 31, 2020

Particulars	Amount
Retained earnings December 31, 2019	$1,670,000
Net income for 2020	$1,085,000
Dividends for 2020	($500,000)
Consolidated retained earnings	$2,255,000

Therefore, Consolidated retained earnings at December 31, 2020 = $2,255,000

5. Controlling share of consolidated net income for 2020.

Particulars	Amount
Consolidate sales	$5,000,000
Less: consolidated expenses	($3,825,000)
Total consolidated income	$1,175,000
Less: non-controlling interest share	$90,000
Controlling share of consolidated net income for 2020	$1,085,000

Therefore, Controlling share of consolidated net income for 2020 = $1,085,000

6.Non-controlling interest December 31, 2020

Particulars	Amount
Stockholders’ equity book value	$2,400,000
Un-amortized excess after four years
Inventory	$ 0
Plants	$160,000
Goodwill	$400,000
Stockholder’s equity at fair value	$2,960,000
25% share	$740,000

Therefore, Non-controlling interest December 31, 2020 = $740,000

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