Question

On January 1, 2013, Daisy Company acquired 90 percent of Rose Company for $700,000 in cash. Rose’s total book value on that date was $620,000 and the fair value of the noncontrollinginterest was $150,500. The newly acquired subsidiary possessed a trademark (10-year remaining life) that, although unrecorded on Rose’s accounting records, had a fair value of $75,000. Any remaining excess acquisition-date fair value was attributed to goodwill.

Daisy decided to acquire Rose so that the subsidiary could furnish component parts for the parent’s production process. During the ensuing years, Rose sold inventory to Daisy as follows:

	Cost to Rose company	Transfer price	Inventory still Held at End of Year (at transfer price)
2013	70,000	100,000	20,000
2014	85,000	120,000	40,000
2015	100,000	115,000	50,000

Any transferred merchandise that Daisy retained at a year-end was always put into production during the following period.

Rose company earned net income during 2015 of 80,000 and distributed dividends of 25,000.

1.Compute annual amortization

2.Compute the balance of investment in Rose account

3.Compute controlling interest share of net income 2015

4. 3.Compute non controlling interest share of net income 2015

5.Record necessary journal entries during 2015 related to intra company transactions.

Answer 1

Please see the answers below-

1. Annual amortization of trademark is 7,500 (75,000/10)
2. Balance of Investment in Rose account-
Here question has not clarified if the dividends are paid out of pre-acquisition profit or post-acquisition profits.
Let's see the impact in both the scenarios-
a. If the dividend is paid out of pre-acquisition profits then Investment will be reduced to the extent dividend received.
Investment made initially	700,000
Less: Dividend received (25000 * 90%)	(22,500)
Balance of investment will be-	677,500
b. If the dividend is paid out of post-acquisition profits then Investment will remain as is.
Balance of investment will be 700,000
3. Share of controlling interest in net income of year 2015-
Net income generated during the year	80,000
Less: Unrealised profit		(6,522)
Sale price of inventory	115,000
Cost price	100,000
Profit margin	13.04%
Unsold stock	50,000
Unrealised profit	6,522
Net income after conolidation adjustment	73,478
Controlling interest share	90%
Controlling interest share in net income	66,130
Assuming the net income given is after intangibles amortisation
4. Non-controlling interest share of net income	7,348
(73,478 - 66130)
5. Journal entries for intra-company transactions in year 2015-
a. Sale of inventory to Daisy:
Account	Nature	Amount
Receivables from Daisy	Debit	115,000
Sales	Credit	(115,000)
b. Dividend distribution to shareholders by Rose:
Account	Nature	Amount
Retained profit	Debit	25,000
Bank/Cash	Credit	(25,000)
c. Receipt of dividend from Rose:
If dividend from pre-acquisition profits
Account	Nature	Amount
Bank/Cash	Debit	22,500
Investment	Credit	(22,500)
If dividend from post-acquisition profits
Account	Nature	Amount
Bank/Cash	Debit	22,500
Retained profits	Credit	(22,500)

Please let me know for any queries.

Thanks.