Question

In: Accounting

Over a 4 year period the Yellow corporation purchased 100% of the outstanding voting shares of...

Over a 4 year period the Yellow corporation purchased 100% of the outstanding voting shares of Green Co. The acquisition was made in a series of steps as follows...

Date % Purchase Price

January, Year 1 5% 5,000

January, Year 2 10% 12,000

January, Year 3   10% 15,000

January, Year 4 75% 200,000

Total 100% 232,000

Any excess of the purchase price over the net book value of the assets was attributed to goodwill.

The acquisition in Year 3 allowed Yellow to have significant influence over the operating policies of Green.

The acquisition in Year 4 gave Yellow control over Green.

Operating results, dividends paid and fair value of White for the 4 years were as follows:

Net Income Dividend Paid Fair Value

January Year 1 100,000

Year 1 25,000 15,000 120,000

Year 2 30,000 15,000 150,000

Year 3 40,000 20,000 170,000

Year 4 50,000 25,000 250,000

For each of the 4 years compute the amount of income that will be record on Yellow's Books related to its Investment in Green Co.

AND compute the balance in the "Investment in Green Co." account on Yellow's books at December 31 of each year.

Solutions

Expert Solution

Year1
Yellow acquire 5% in Green Co.
Fair Value 120000
5% Investment in shares 6000
Purchase price -5000
Profit & Loss 1000
Assuming Investment in Common shares are recorded at fair value through Profit & loss
Year 2
Yellow acquire 10% in Green Co.
Fair Value 150000*10% 150000
10% Investment in shares 15000
Purchase price -12000
Profit & Loss 3000
Change in Fair value Investment acquire at 5%
Fair Value 150000*5% 7500
Less : 5% Investment in shares -6000
Profit & Loss 1500
15% Investment in Green Co. 22500
Year 3
Yellow acquire 10% in Green Co. at 15000 Now Green co.is associate entity
Fair Value 170000
10% Investment in shares 170000*10% 17000
Purchase price -15000
Profit & Loss 2000
Change in Fair value Investment acquire
Fair Value 170000*15% 25500
Less : 15% Investment in Green Co. -22500
Profit & Loss 3000
25% Investment in Green Co. 42500
Year 4
Yellow acquire 75% in Green Co. at 200000
Consideration paid 75% 200000
Add Fairvalue of Investment held before control 25% WN1 62500
Less: Fairvalue of Net Assets -250000
Goodwill 12500
WN1
Calculation of gain/loss on remeasurment of Investment 25% in Green Co.
Investment Fair value on Year 4 250000*25% 62500
Less: Investment recorded at book value -42500
Transfer to profit& loss 20000
Income Statement of Yellow Co. Year1 Year2 Year3 Year4
Dividend Income 15000*.05= 15000*15% 20000*25% 25000*100%
750 2250 5000 25000
Change in Fairvalue of Investment 1000 4500 5000 20000
Balance Sheets of Yellow co.
Non Current Assets
Investment in Green Co. 6000 22500 42500 262500

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