Question

On January 1, 2017, ABMLJ Corporation paid $9 per share to a group of Fuller Corporation shareholders to acquire 60,000 shares of Fuller’s outstanding voting stock. The remaining 40,000 shares of Fuller continued to trade in the market close to its recent average of $8.50 per share both before and after the acquisition by ABMLJ. Fuller’s acquisition date balance sheet follows:                                                                                                                                  

Current assets	15,800	Liabilities	239,000
Property and equipment (net)	309,800	Common stock	100,000
Patents	238,400	Retained earnings	225,000
	564,000		564,000

                                                                                                                                                

On January 1, 2017, ABMLJ assessed the carrying amount of Fuller’s equipment (5-year remaining life) to be undervalued by $39,000. ABMLJ also determined that Fuller possessed unrecorded patents (10-year remaining life) worth $391,500. Fuller’s acquisition-date fair values for its current assets and liabilities were equal to their carrying amounts. Any remaining excess of Fuller’s acquisition-date fair value over its book value was attributed to goodwill.                                                                                                                                    

Requirement: Compute the amount of goodwill recognized in ABMLJ’s acquisition of Fuller and the allocation of goodwill to the controlling and noncontrolling interest.           

Answer 1

SOLUTION:

As ABMLJ Corporation Paid $ 9 per share for 60,000 shares of Fuller Corporation.

Total Purchase Consideration = 60,000 Shares * $ 9 = $ 5,40,000

CALCULATION OF GOODWILL:

Book Value of Assets

Current Assets	15800	Liabilities	239000
Property & Equipment	309800	Common Stock	100000
Patents	238400	Retained Earnings	225000
	564000		564000

Fair Value of Assets

Current Assets	15800
Property & Equipment	270800	(309800-39000)
Patents	629900	(238400+391500)
Liabilities	-239000
Net Assets	677500

Goodwill = Net Identifiable Assets - Consideration

= 677500 - 540000

= $ 137,500

Goodwill allocation

When the parent doesn’t acquire all of the subsidiary’s outstanding common stock, some portion of the subsidiary’s ownership rests with outside investors called minority shareholders. The stake of outside investors in a subsidiary is called non-controlling interest (also called minority interest).

When non-controlling interest (NCI) exists, the goodwill arising on acquisition must be allocated between the parent and the NCI. The allocation depends on whether the fair value of purchase consideration and fair value non-controlling interest at the acquisition date were based on the same price per share of the common stock. If the fair value of purchase consideration (paid by the parent) and fair value of the non-controlling interest are based on the same share price, goodwill is allocated proportionately. However, where the majority stake is valued at a relatively higher price (i.e. the price paid per share by the parent is higher than the price paid by minority shareholders) due to existence of control premium, the allocation of goodwill is not proportionate. Where control premium exists, the additional goodwill resulting from premium is allocated solely to the parent and the amount of goodwill allocated to subsidiary is the same as if no control premium existed