Question

Equity in Net Income and Noncontrolling Interest in Net Income

Palm Resorts acquired its 70 percent interest in Sun City on January 1, 2017, for $41,750,000. The fair value of the 30 percent noncontrolling interest at the date of acquisition was $14,750,000. Sun City’s date-of-acquisition reported net assets of $5,000,000 were carried at amounts approximating fair value, but it had unrecorded identifiable intangibles, capitalizable per ASC Topic 805, valued at $7,500,000. These intangibles are determined to have limited lives, amortized on a straight-line basis over five years. It is now December 31, 2020, and Sun City reports net income of $10,000,000.

Required

a. Calculate the amount of goodwill originally reported for this acquisition, and its allocation to the controlling and noncontrolling interests.

Enter answers in thousands (example, $41,750,000 equals $41,750 in thousands).

Total goodwill	$Answer
Allocation to controlling interests	$Answer
Allocation to noncontrolling interests	$Answer

b. Calculate equity in net income and the noncontrolling interest in net income for 2020, assuming goodwill from this acquisition is impaired by $2,000,000 in 2020.

Enter answers in thousands (example, $3,000,000 equals $3,000 in thousands).

Use negative signs with answers that reduce net income amounts.

		Total	Equity in NI	Noncontrolling Interest in NI
Sun City’s reported net income		$Answer	$Answer	$Answer
Revaluation write-offs:
Identifiable intangibles		Answer	Answer	Answer
Goodwill impairment loss		Answer	Answer	Answer
		$Answer	$Answer	$Answer

Answer 1

a.	Compute and allocate goodwill as follows (amounts in thousands)
	Particulars	Amount ('000)	Amount ('000)
	Cost of acquisition		$41,750
	Add: Fair value of noncontrolling interest		$14,750
	Total fair value		$56,500
	Less:
	Book value of assets	$5,000
	Unrecorded identifiable intangibles	$7,500	$12,500
	Total goodwill		$44,000
	Allocate goodwill as follows
	Allocation to controlling interests ($44,000 × 70%)		$30,800
	Allocation to noncontrolling interests ($44,000 × 30%)		$13,200
	Total goodwill		$44,000
b.	Compute equity in net income and noncontrolling interest in net income as follows (in '000)
	Particulars	Total	Equity in Net Income	Noncontrolling Interest in net income
	Net income reported (70:30)	$10,000	$7,000	$3,000
	Less: Revaluation write-offs
	Identifiable intangibles (70:30)	($1,500)	($1,050)	($450)
	Goodwill impairment loss	($2,000)	($1,400)	($600)
	Net income after revaluation write-offs	$6,500	$4,550	$1,950
	Notes:
	Net income ($10,000 × 70%)		$7,000
	Net income ($10,000 × 30%)			$3,000
	Intangibles ($7,500 ÷ 5) × 70%		$1,050
	Intangibles ($7,500 ÷ 5) × 30%			$450
	Goodwill impairment ($2,000 × 70%)		$1,400
	Goodwill impairment ($2,000 × 30%)			$600