Question

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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.

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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