Pirate Corporation purchased 80% of shares of Stanley, Inc. for $500,000 cash on January 1, 2016....

Pirate Corporation purchased 80% of shares of Stanley, Inc. for $500,000 cash on January 1, 2016. The fair value of the noncontrolling interest was $70,000 on the acquisition-date. On January 1, 2016, Stanley’s net assets had a total carrying amount of $480,000. Equipment (six-year remaining life) was undervalued on the financial statements by $60,000. Any remining excess fair value over book value was attributed to a patent (four-year remaining life), but not recorded on its books. Stanley recorded net income of $90,000 in 2016 and $70,000 in 2017. Each year since the acquisition, Stanley has declared a $10,000 dividend. On January 1, 2018, Pirate’s Retained Earnings show a $300,000 balance. Selected account balances for the two companies from their separate operations were as follows:

Pirate Stanley

2018 Revenues 500,000 300,000

2018 Expenses 300,000 150,000

a. Calculate the total Fair Value for the total acquisition

b. Calculate the annual amortization

c. What is the total consolidated net income for 2018?

Expert Solution

Problem has been solved using equity method

a. Calculate the total Fair Value for the total acquisition

Consideration paid in cash	A	5,00,000
Non controlling interest at fair value	B	70,000
Fair Value of Acquisition	C= A+B	5,70,000
Less
Carrying amount of net asset on acq. Date	D	4,80,000
Excess fair over book value	E=C-D	90,000
of which amt atrribute to
Equipment (remaining 8 year life)(undevalued amt as given in question)	F	60,000
a patent (four-year remaining life)	G=E-F	30,000

b. Calculate the annual amortization

Amortization
Equipment (remaining 8 year life)	A	60,000
remaining 8 year	B	6
Equipment - Amortization	C=A/B	10,000

a patent (four-year remaining life)	A	30,000
remaining 4 year	B	4
a patent - Amortization	C=A/B	7,500

Total Amortization	C+C	17,500

c. What is the total consolidated net income for 2018?

Consolidated income
Revenue
Pirate Corporation	5,00,000
Stanley	3,00,000	8,00,000
Less
Expense
Pirate Corporation	3,00,000
Stanley	1,50,000	4,50,000
total Amortization		17,500
Consolidated income (8 - 4.5 - 0.175)		3,32,500

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