Question

In: Accounting

Subsidiary Company reported the following net income and dividends for the years indicated: Year Net Income...

  1. Subsidiary Company reported the following net income and dividends for the years indicated:

Year

Net Income

Dividends

20X6

35,000

12,000

20X7

45,000

20,000

20X8

30,000

14,000

Parent acquired 75% of Subsidiary’s common stock on January 1, 20X6. On that date, the fair value of Sub’s net assets was equal to the book value. Parent uses the equity method in accounting for its ownership in Sub and reported a balance of $259,800 in its investment account on December 31, 20X8.

  1. What amount did Parent pay to acquire Subsidiary’s shares?
  1. What was the fair value of Sub’s net assets on January 1, 20X6?

  1. What amount will be assigned to the NCI shareholders in the consolidated balance sheet prepared at December 31, 20X8?

Solutions

Expert Solution

a. Under the equity method, we will report investment at a proportionate share of the investee’s equity as an investment (at cost). Profit and loss from the investee increase the investment account by an amount proportionate to the investor’s shares in the investee. This is known as the “equity pick-up.” Dividends paid out by the investee are deducted from this account.

So basically profit/loss will be added to the investment amount and the dividend paid would be deducted from the investment.

But here we are given ending balance at the end of the year 2018 and we have to calculate the opening balance of investment. So we will add dividends paid and deduct profits earned to reverse calculate.

yr net income Parent share(75%) dividend Parent share(75%)
2016 35000 26250 12000 9000
2017 45000 33750 20000 15000
2018 30000 22500 14000 10500
110000 82500 46000 34500

So opening balance/cost of investment=259,800+34500-82500 = $211800

b. Parent company has purchased 75% share of sub comapny at $211800(as calculated above).

So 100% value:

Fair value of net assets = 211800/75% = $282400

c. Under euity method there is no need to report NCI.

But under other method its value would be : (259800/75%)*25% = $86600 .

ekkarill92 answered 2 months ago
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