Question

On January 1, 2018, Pomegranate Company acquired 90% of the voting stock of Starfruit Company for $91,700,000 in cash. The fair value of the noncontrolling interest in Starfruit at the date of acquisition was $6,300,000. Starfruit’s book value was $13,000,000 at the date of acquisition. Starfruit’s assets and liabilities were reported on its books at values approximating fair value, except its plant and equipment (10-year life, straight-line) was overvalued by $25,000,000. Starfruit Company had previously unreported intangible assets, with a market value of $40,000,000 and 5-year life, straight-line, which were capitalized following GAAP.

Additional information: Pomegranate uses the complete equity method to account for its investment in Starfruit on its own books. Goodwill recognized in this acquisition was impaired by a total of $2,000,000 in 2018 and 2019, and by $500,000 in 2020. It is now December 31, 2020, the accounting year-end.

Here is Starfruit Company’s trial balance at December 31, 2020:

Dr (Cr)

Current assets $28,200,000

Plant & equipment, net 188,000,000

Intangibles 2,000,000

Liabilities (180,000,000)

Capital stock (1,000,000)

Retained earnings, January 1 (29,500,000)

Acumulated other comprehensive income, January 1 (500,000)

Dividends 400,000

Sales revenue (24,000,000)

Cost of goods sold 10,000,000

Operating expenses 6,500,000

Other comprehensive income (100,000)

Question:

On the 2020 consolidated income statement, the noncontrolling interest in net income of Starfruit is

$150,000

$175,000

$200,000

$750,000

Answer 1

Option A - $150,000 is correct.

Calculation of noncontrolling interest in net income of Starfruit:

Given: Controlling interest is 90% so, noncontrolling interest is 10% (100%-90%).

Results of the excel sheet are as follows:

Calculation of net income:

Results of the excel sheet are as follows: