Question

On January 1, 20X6, Plus Corporation acquired 90 percent of Side Corporation for $180,000 cash. Side reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Side reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Side at the date of acquisition had a remaining economic life of five years. Plus uses the equity method in accounting for its investment in Side. Based on the preceding information, the increase in the fair value of patents held by Side is:

Answer 1

Answer:

$25,000

Explanation:

Plus corporation acquired 90% of Side Corporation for $180,000 cash.

Net income = $30,000

Dividend for 3 years = $10,000

Common stock outstanding = $100,000

Retained earnings = $60,000

Fair value = $20,000

Book value of land = $30,000

Market value of land = $35,000

Book value of equipment = $50,000

Market value of equipment = $60,000

Required:

Find the increase in the fair value of patents held by Side Corporation.

To find the increase in the fair value of patents, use:

Increase in fair value = Fair value of corporation - Total value without patent.

Where

Fair value = $180,000 + $20,000 = $200,000

Total value without patent = common stoc(100,000) + retained earnings(60,000) + equipment adjustment($60,000 - $50,000 = $10,000) + land adjustment($35,000 - $30,000= $5,000) =

$100,000 + $60,000 + $10,000 + $5,000 = $175,000

Therefore,

Increase = Fair value of corporation($200,000) - Total value without patent($175,000) = $25,000

The increase in the fair value of patents held by Side Corporation is $25,000