Question

P3-24   Parent Company and Consolidated Balances

Exacto Company reported the following net income and dividends for the years indicated:

year     net income       dividends

20X5    $35000           $12,000

20X6    45,000             20,000

20X7    30,000             14,000

True Corporation acquired 75 percent of Exacto’s common stock on January 1, 20X5. On that date, the fair value of Exacto’s net assets was equal to the book value. True uses the equity method in accounting for its ownership in Exacto and reported a balance of $259,800 in its investment account on December 31, 20X7.

Required

a. What amount did True pay when it purchased Exacto’s shares?

b. What was the fair value of Exacto’s net assets on January 1, 20X5?

c. What amount was assigned to the NCI shareholders on January 1, 20X5?

d. What amount will be assigned to the NCI shareholders in the consolidated balance sheet prepared at December 31, 20X7?

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Answer 1

Solutions

a. Calculation of amount True pay to purchase Exacto’s shares

Particulars	Amount ($)	Amount ($)
Balance in investment account, December 31, 20x7		259,800
Cumulative earnings since acquisition*	110,000
Less: Cumulative dividends since acquisition**	(46,000)
Total (Cumulative earning – Cumulative dividends)	64,000
Proportion of stock held by True Corporation   (75 % )	0.75
Total amount debited to Investment account   (0.75 X 64,000)		(48,000)
Purchase amount on January 1, 20X5 (Balance in investment account - Total amount debited to Investment account i.e. 259,800- 48,000   )		211,800

*Cumulative earnings since acquisition

= Net Income of year 20X5 + Net Income of year 20X6 + Net Income of year 20X7

= $ 35,000 + $ 45,000 + $ 30,000

=$ 110,000

** Cumulative dividends since acquisition

= Dividends of year 20X5 + Dividends of year 20X6 + Dividends of year 20X7

= $ 12,000 + $ 20,000 + $ 14,000

=$ 46,000

b. Calculation of Fair value of Exacto’s net assets on January 1, 20X5

Particulars	Amount ($)
Purchase amount of True Corporation’s	211,800
Percentage of True Corp.’s                   (75 %)	0.75
Fair Value of Exacto Company’s Net Assets (Purchase amount of True Corporation’s / Percentage of True Corp.’s i.e.       211,800 / 0.75)	282,400

c. Calculation of amount assigned to the NCI shareholders on January 1, 20X5

Particulars	Amount ($)
Fair Value of Exacto Company’s Net Asset	282,400
Percentage of Exacto Company          (25 %)	0.25
Amount assigned to NCI’s shareholders                                                                (Fair Value of Exacto Company’s Net Asset X Percentage of Exacto Company i.e.   282,400 X 0.25)	70,600

           

d. Calculation of amount assigned to the NCI shareholders in the consolidated balance sheet prepared at December 31, 20X7

Particulars	Amount ($)
Investment balance of True Corp’s	259,800
Percentage of True Corp’s                                    (75 %)	0.75
Fair Value of Exacto’s Net Assets 20X7 (Investment balance of True Corp’s / Percentage of True Corp.’s i.e.       259,800/ 0.75)	346,400
Percentage of Exacto Company                           (25%)	0.25
Amount assigned to NCI’s shareholders in consolidated balance sheet prepared at December 31, 20X7         (Fair Value of Exacto’s Net Assets 20X7 X Percentage of Exacto Company i.e.   346,400 X 0.25)	86,600

Answers

a. What amount did True pay when it purchased Exacto’s shares?	$211,800
b. What was the fair value of Exacto’s net assets on January 1, 20X5?	$282,400
c. What amount was assigned to the NCI shareholders on January 1, 20X5?	$ 70,600
d. What amount will be assigned to the NCI shareholders in the consolidated balance sheet prepared at December 31, 20X7?	$ 86,600