Question

On January 1, 2012, Uncle Company purchased 80 percent of Nephew Company’s capital stock for $672,000 in cash and other assets. Nephew had a book value of $806,000 and the 20 percent noncontrolling interest fair value was $168,000 on that date. On January 1, 2011, Nephew had acquired 30 percent of Uncle for $325,750. Uncle’s appropriately adjusted book value as of that date was $1,052,500.
Separate operating income figures (not including investment income) for these two companies follow. In addition, Uncle declares and pays $30,000 in dividends to shareholders each year and Nephew distributes $4,000 annually. Any excess fair-value allocations are amortized over a 10-year period.
Uncle Nephew
Year Company Company
2012 $131,000 $44,600
2013 174,000 55,000
2014 213,000 68,200
A. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary’s income recognized by Uncle in 2014?
B. What is the noncontrolling interest’s share of 2014 consolidated net income?

Answer 1

Answer:

a. $51,840

b. $15,440

Explanation;

a. First find the excess fair-value allocation;

= Fair value of Nephew - Book Value

Fair Value = Uncle ownership + Non-controlling interest

= 672,000 + 168,000

= $840,000

Excess fair value = 840,000 - 806,000

= $34,000

Any excess fair-value allocations are amortized over a 10-year period;

= 34,000/10

= $3,400

The Income to be recognized will be reduced by this yearly amotization so the 2014 income recognized by Uncle would be;

= (Nephew income - Amortization) * Uncle ownership stake

= ( 68,200 - 3,400) * 0.8

= $51,840‬

b. Nephew Company also owns 30% of Uncle which means that they will receive 30% of Uncle dividends.

= 0.3 * 30,000

= $9,000

Added to their own income;

= 9,000 + 68,200

= $77,200

The Non-controlling interest owns 20% so the income they will recognise is;

= 0.2 * 132,100

= $15,440‬