Consolidation Eliminations Several Years after Acquisition Paramount Corporation

Question

Consolidation Eliminations Several Years after Acquisition

Paramount Corporation acquired its 75 percent investment in Sun Corporation in January 2012, for $2,910,000 and accounts for its investment internally using the complete equity method. At the acquisition date, total book value of Sun was $1,500,000 including $800,000 of retained earnings, and the estimated fair value of the 25 percent noncontrolling interest was $790,000. The fair values of Sun's assets and liabilities were equal to their carrying values, except for the following items:

The receivables were collected and the inventory sold during the first three years following the acquisition. Deferred tax liabilities of $60,000 were reversed during 2012–2017. An impairment test made at the end of 2017 indicates a remaining value of $2,000,000 for the goodwill recognized as a result of the acquisition. Sun's stockholders' equity is $2,500,000 including $1,800,000 of retained earnings, at the end of 2017.

Required
(a) Calculate the amount of goodwill initially recognized as a result of the acquisition, and its allocation to the controlling and noncontrolling interests.

(b) Calculate the balance in the investment account, carried on Paramount's books, and the value of the noncontrolling interest, reported in the equity section of the consolidated balance sheet, as of the end of 2017.

(c) Assume eliminating entry (C), to reverse Paramount's equity method entries for 2018, has been made. Prepare 2018 eliminating entries (E) and (R) to adjust Sun's assets to the correct values as of the beginning of 2018, eliminate the remainder of the investment, and recognize the beginning-of-2018 value of the noncontrolling interest.

Fair value less Book value Accounts receivable $(100,000) Inventory (125,000) Equipment (10 years, straight-line) (400,000) Patents (5 years, straight-line) 200,000 Deferred tax liabilities (created as a result of the nontaxable acquisition) 75,000

Explanation / Answer

1)

Paramount’s acquisition cost

$ 2,910,000

Fair value of noncontrolling interest

790,000

Total

3,700,000

Fair value of identifiable net assets:

1,500,000 – 100,000 – 200,000 – 400,000 + 200,000

1,000,000

Goodwill

$ 2,700,000

Paramount’s share of goodwill = $2,910,000 – 75%($1,000,000) = $2,160,000 (80%)

Noncontrolling interest’s share of goodwill = $540,000 (20%)

2)

Investment

Noncontrolling

interest

January 2012 balance

$   2,910,000

$       790,000

Change in Sun’s retained earnings, 2012-2017:

(1,800,000 – 800,000), divided 75:25

750,000

250,000

Write-off of Sun’s identifiable net asset revaluations, 2012-2017: (100,000 + 200,000 + 240,000 – 200,000), divided 75:25

255,000

85,000

Goodwill impairment, 2012-2017:

(2,700,000 – 2,000,000), divided 80:20

(560,000)

(140,000)

Balance, end of 2017

$ 3,355,000

$      985,000

3) (E)

Stockholders’ equity-Sun

2,400,000

Investment in Sun

1,800,000

Noncontrolling interest in Sun

600,000

(R)

Goodwill

2,000,000

Equipment, net (1)

160,000

Investment in Sun (2)

1,480,000

Noncontrolling interest in Sun (3)

360,000

(1) $400,000 – (6/10) x $400,000

(2) (80% x 2,000,000) – (75% x 160,000)

(3) (20% x 2,000,000) – (25% x 160,000)

Paramount’s acquisition cost

$ 2,910,000

Fair value of noncontrolling interest

790,000

Total

3,700,000

Fair value of identifiable net assets:

1,500,000 – 100,000 – 200,000 – 400,000 + 200,000

1,000,000

Goodwill

$ 2,700,000

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