Question

On December 31, 20X5, Paris Corporation acquired 60 percent of Sanlo Company's common stock for $180,000. At that date, the fair value of the noncontrolling interest was $120,000. Of the $45,000 differential, $5,000 related to the increased value of Sanlo's inventory, $15,000 related to the increased value of its land, and $10,000 related to the increased value of its equipment that had a remaining life of five years from the date of combination. Sanlo sold all inventory it held at the end of 20X5 during 20X6. The land to which the differential related was also sold during 20X6 for a large gain. In 20X6, Sanlo reported net income of $40,000 but paid no dividends. Paris accounts for its investment in Sanlo using the equity method.
Required information
1. Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is:
a. $9,000.
b. $15,000.
c. $27,000.
d. $45,000.
2. Based on the preceding information, what amount of differential would Paris amortize during 20X6 in its equity method journal entries?
a. $13,200.
b. $15,000.
c. $22,000.
d. $30,000.

Answer 1

Answer:

1. b. $15,000

2. a. $13,200

Explanation:

a. Fair Value of Consideration $180,000

Non Controlling Interest $120,000

Differential in value of Sanlo $45,000

Good will = $15,000

b. Value of Equipment = $10,000 / 5 = $2,000

$2,000 * 60% = $1,200

Value of land = $15,000 * 60% = $9,000

Value of Sanlo's Inventory = $5,000 * 60% = $3,000

Total value amortize using equity method is $13,200