Question

On January 1, Patterson Corporation acquired 80 percent of the 100,000 outstanding voting shares of Soriano, Inc., in exchange for $31.25 per share cash. The remaining 20 percent of Soriano’s shares continued to trade for $30 both before and after Patterson’s acquisition.

At January 1, Soriano’s book and fair values were as follows

	Book Values	Fair Values	Remaining Life
Current assets	$80,000	$80,000
Buildings and equipment	$1,250,000	$1,000,000	5 years
Trademarks	$700,000	$900,000	10 years
Patented technology	$940,000	$2,000,000	4 years
	$2,970,000
Current liabliities	$180,000	$180,000
Long-term notes payable	$1,500,000	$1,500,000
Common stock	$50,000
Additional paid-in capital	$500,000
Reatained earnings	$740,000 $2,970,000

In addition, Patterson assigned a $600,000 value to certain unpatented technologies recently developed by Soriano. These technologies were estimated to have a 3-year remaining life.

During the year, Soriano declared a $30,000 dividend for its shareholders. The companies reported the following revenues and expenses from their separate operations for the year ending December 31.

	Patterson	Soriano
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$3,000,000	$1,400,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,750,000	600,000

a.What total value should Patterson assign to its Soriano acquisition in its January 1 consolidated balance sheet?

b.What valuation principle should Patterson use to report each of Soriano’s identifiable assets and liabilities in its January 1 consolidated balance sheet?

c.For years subsequent to acquisition, how will Soriano’s identifiable assets and liabilities be valued in Patterson’s consolidated financial statements?

d.How much goodwill resulted from Patterson’s acquisition of Soriano?

e.What is the consolidated net income for the year and what amounts are allocated to the controlling and noncontrolling interests?

f.What is the noncontrolling interest amount reported in the December 31 consolidated balance sheet?

g.Assume instead that, based on its share prices, Soriano’s January 1 total fair value was assessed at $2,250,000. How would the reported amounts for Soriano’s net assets change on Patterson’s acquisition-date consolidated balance sheet?

Answer 1

a)
Patterson’s consideration transferred ($31.25 × 80,000 shares)	$2,500,000
Noncontrolling interest fair value ($30.00 × 20,000 shares)	$600,000
Soriano’s total fair value	$3,100,000
b)
Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value.
d)
Soriano’s total fair value 1/1	$3,100,000
Soriano’s net assets book value	1,290,000
Excess acquisition-date fair value over book value	$1,810,000
Adjustments from book to fair values
Buildings and equipment		-250,000
Trademarks		200,000
Patented technology		1,060,000
Unpatented technology		600,000	1,610,000
Goodwill			$200,000
e)
Combined revenues	$4,400,000
Combined expenses		-2,350,000
Building and equipment excess depreciation		50,000
Trademark excess amortization		-20,000
Patented technology amortization			-265,000
Unpatented technology amortization			-200,000
Consolidated net income		$1,615,000
To noncontrolling interest:
Soriano’s revenues	$1,400,000
Soriano’s expenses	-600,000
Total excess amortization expenses (above)	-435,000
Soriano’s adjusted net income	$365,000
Noncontrolling interest percentage ownership	20%
Noncontrolling interest share of consolidated net income	$73,000
To controlling interest:
Consolidated net income	$1,615,000
Noncontrolling interest share of consolidated net income	-73,000
Controlling interest share of consolidated net income	$1,542,000
f)
Fair value of noncontrolling interest January 1,	$600,000
2009 income		73,000
Dividends (20% × $30,000)			-6,000
Noncontrolling interest December 31, 2009			667,000
g)
Soriano’s total fair value 1/1	$2,250,000
Collective fair values of Soriano’s net assets	$2,900,000
Bargain purchase	$650,000