Question

Barnes Corporation purchased 75 percent of Nobles’ common stock for $262,500, which was acquired at book value. The fair value of the noncontrolling interest at the date of acquisition was equal to their proportionate share of the book value of Nobles. During the year, Nobles reports net income of $40,000, while Barnes reports earnings of $200,000 from its own operations. Barnes pays dividends during the year of $50,000, and Nobles pays dividends of $10,000. On January 1, Barnes has a retained earnings balance of $500,000 while Nobles has retained earnings of $300,000. Barnes accounts for its investment in Nobles using the equity method. What is the total differential, assuming Barnes paid fair value of $300,000 for 75 percent ownership of Nobles while Nobles’ book value was $350,000?

Answer 1

Solution:

Barnes Corporation purchased 75 percent of Nobles’ common stock

During the year, Nobles reports net income of $40,000.

Hence, 75% of net income of Nobbles is attributable to Barnes Corporation.

Barnes reports for income from subsidiary prior to consolidation

                                                          = 40,000 x 75%

                                                           = $30,000