Question

On December 31, 2020, Petra Company invests $26,000 in Valery, a variable interest entity. In contractual agreements completed on that date, Petra established itself as the primary beneficiary of Valery. Previously, Petra had no equity interest in Valery. Immediately after Petra’s investment, Valery presents the following balance sheet:

Cash	$	26,000	Long-term debt	$	114,000
Marketing software		146,000	Noncontrolling interest		78,000
Computer equipment		46,000	Petra equity interest		26,000
Total assets	$	218,000	Total liabilities and equity	$	218,000

Each of the amounts represents an assessed fair value at December 31, 2020, except for the marketing software.

The December 31 business fair value of Valery is assessed at $104,000.

1. If the carrying amount of the marketing software was undervalued by $31,000, what amounts for Valery would appear in Petra’s December 31, 2020, consolidated financial statements?

2. If the carrying amount of the marketing software was overvalued by $31,000, what amounts for Valery would appear in Petra’s December 31, 2020, consolidated financial statements?

If the carrying amount of the marketing software was undervalued by $31,000, what amounts for Valery would appear in Petra’s December 31, 2020, consolidated financial statements? (Input all amounts as positive values.)

	Account Amount

If the carrying amount of the marketing software was overvalued by $31,000, what amounts for Valery would appear in Petra’s December 31, 2020, consolidated financial statements? (Input all amounts as positive values.)

	Account Amount

Answer 1

Amounts are in $

The values of Liabilities are not given in the balance sheet. But we have the Fair value of Valery on December 31, 2020 as $104,000. Using this we can find the values of capital and long term liability. (Assuming the given value of marketing software at $146,000)

Non Controlling Interest = 104,000 - 26,000 = 78,000

Long term liabilities = 218,000 - 78,000 - 26,000 = 114,000

1 & 3)

If the carrying amount of marketing software was undervalued by $31,000

Account	Amount
Cash	26,000
Marketing software (146,000+31,000)	177,000
Computer equipment	46,000
Long term debt	-114,000
Non Controlling interest	-78,000
Petra equity interest	-26,000
Gain on bargain Purchase	-31,000

In the Consolidated Financial Statements, all the above balances would appear except Petra equity interest account which will be set off against investment account balance.

2 & 4)

Inf the carrying amount of marketing software is overvalued by $31,000

Account	Amount
Cash	26,000
Marketing software (146,000-31,000)	115,000
Computer equipment	46,000
Long term debt	-114,000
Non Controlling interest	-78,000
Petra equity interest	-26,000
Goodwill	31,000

In the consolidated financial statements, all the above balances would appear except the Petra eauity interest which will be set off against the investment account having same balances of 26,000.

Note :

This is initial measurement and not subsequent measurement.