Question

On January 1, 2015, Morey, Inc., exchanged $180,025 for 25 percent of Amsterdam Corporation. Morey appropriately applied the equity method to this investment. At January 1, the book values of Amsterdam’s assets and liabilities approximated their fair values.

On June 30, 2015, Morey paid $567,000 for an additional 70 percent of Amsterdam, thus increasing its overall ownership to 95 percent. The price paid for the 70 percent acquisition was proportionate to Amsterdam’s total fair value. At June 30, the carrying amounts of Amsterdam’s assets and liabilities approximated their fair values. Any remaining excess fair value was attributed to goodwill.

Amsterdam reports the following amounts at December 31, 2015 (credit balances shown in parentheses):

Revenues	$	(294,000	)
Expenses		219,000
Retained earnings, January 1		(195,700	)
Dividends declared, October 1		30,000
Common stock		(500,000	)

Amsterdam’s revenue and expenses were distributed evenly throughout the year and no changes in Amsterdam’s stock have occurred.

a.	Using the acquisition method, calculate the acquisition-date fair value of Amsterdam to be included in Morey's consolidated financial statements.

      

b.	Using the acquisition method, calculate the revaluation gain (or loss) reported by Morey for its 25 percent investment in Amsterdam on June 30.

    

c.	Using the acquisition method, calculate the amount of goodwill recognized by Morey on its December 31 balance sheet (assume no impairments have been recognized).

    

d.	Using the acquisition method, calculate the noncontrolling interest amount reported by Morey on its June 30 and December 31 consolidated balance sheet.

      

Answer 1

Solution-

a)Acquisition-date fair value of Amsterdam
Amsterdam Fair Value paid by Morey = $567,000 / 70%	$810,000.00
b) Revaluation Gain/(loss)
1/1 equity investment in Amsterdam (book value) =	$180,025.00
25% income for 1st 6 months ($294,000 - $219,000) X 25% X 6/12	$9,375.00
Investment book value at 6/30 (b)	$189,400.00
Fair value of investment at 6/30 ($810,000 X 25%) (a)	$202,500.00
Gain on revaluation to fair value (a) - (b)	$13,100.00	Fair value is more than the book value. Hence there will be a gain on the revaluation
c) Goodwill recognized
Goodwill at 12/31
Fair value of Amsterdam at 6/30	$810,000.00
Book value at 6/30 = ($500,000 + $195,700)+(294,000 - 219,000) X 6/12	$733,200.00
Excess fair value =	$76,800.00
Allocation to goodwill (no impairment)	$76,800.00
d)Noncontrolling interest
5% fair value balance at 6/30 = $810,000 X 5%	$40,500.00	Noncontrolling interest 6/30
5% income from 6/30 to 12/31 = (294,000 - 219,000) X 6/12 X 5%	$1,875.00

5% dividends = $30,000 X 5%	($1,500.00)
Noncontrolling interest 12/31=	$40,875.00