Question

On 1/1/2016, California Corporation purchased 75% of the outstanding voting stock of San Diego Corporation for $2,400,000 paid in cash. On the date of the acquisition, San Diego’s shareholders’ equity consisted of the following:

Common stock, $10 par                 $1,000,000

APIC                                                   600,000

Retained Earnings                               800,000

Total SE                                         $2,400,000

The excess fair value of the net assets acquired was assigned 10% to undervalued Inventory (sold in 2016), 40% to undervalued PPE assets with a remaining useful life of 8 years, and 50% to Goodwill.

Comparative trial balances of California Corporation and San Diego Corporation at December 31, 2020, are as follows:

	California	San Diego
Other assets – net	3,765,000	2,600,000
Investment in San Diego	2,340,000	-
Expenses (including cost of sales)	3,185,000	600,000
Dividends	500,000	200,000
	9,790,000	3,400,000
Common Stock, $10 par value	(3,000,000)	(1,000,000)
APIC	(850,000)	(600,000)
Retained earnings	(1,670,000)	(800,000)
Sales revenues	(4,000,000)	(1,000,000)
Income from San Diego	(270,000)	-
	(9,790,000)	(3,400,000)

Required:

Determine the amounts that would appear in the consolidated financial statements of California Corporation and its subsidiary for each of the following items:

1. Goodwill at December 31, 2020. (2 points)
2. Income to Non-controlling interest for 2020. (3 points)
3. Consolidated retained earnings at December 31, 2019. (2 points)
4. Consolidated retained earnings at December 31, 2020. (2 points)
5. Controlling share of consolidated Net Income for 2020. (3 points)
6. Non-controlling interest at December 31, 2020. (3 points)

Answer 1

Outstanding shares of San Diego at the time of Acquisition = Common Stock + APIC = 1,600,000

75% of Current outstanding shares = 1,200,000

Californica Corp purchased 75% shares at = 2,400,000

Excess Paid over value = 2,400,000 - 1,200,000 = 1,200,000

Goodwill at December 31, 2020 = 50% of excess value = 600,000

Income to Non-controlling interest = 25% * Income from San Diego = 25% * 270,000 = 67,500

California's RE in 2019 would be after subtracting its own Net Income and adding Dividends

California Retained earnings, 2019 = California's RE (2020) - California's Net Income (2020) + Dividends = 1,670,000 - (4,000,000 - 3,185,000) + 500,000 = 1,355,000

San Diego's RE in 2019 would be calculated similarly

San Diego's RE, 2019 = 800,000 - (1,000,000 - 600,000) + 200,000 = 600,000

As San Diego's RE reduced at the end of 2019 by 200,000, hence, 75% of reduction will reflect in California's consolidated RE in 2019

California's Consolidated RE, 2019 = 1,355,000 - 0.75 * 200,000 = 1,205,000

In 2020, San Diego's RE is same as at the time of acquisition, 800,000. Hence, California's Consolidated RE will be same as its individual RE.

California Consolidated Retained Earnings, 2020 = 1,670,000

Calfornia's Net Income in 2020 = 4,000,000 - 3,185,000 = 815,000

San Diego's Net Income in 2020 = 1,000,000 - 600,000 = 400,000

Controlling share of consolidated Net Income, 2020 = California's Net Income + 75% * San Diego's Net Income

Controlling share of consolidated Net Income, 2020 = 815,000 + 75% * 400,000 = 1,115,000

The amount paid for 75% shares = 2,400,000

Value of remaining 25% (Non controlling) in 2016 = 800,000

Excess paid for Non controlling interest = 800,000 - 25% * 1,600,000 = 400,000

With amortization of excess paid over 10 years.

Non-Controlling Interest in 2020 = Actual Value of NCI - Accumulated Amortization of excess value paid + Net Income to NCI - Dividends paid to NCI = 400,000 - 5 * 400,000 * 1/10 + 67,500 (Ref NCI Income above) - 25% * 200,000 = 217,500