In: Accounting
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.
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 |