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Winner Corporation acquired 80 percent of the common shares and 70 percent of th

ID: 2498123 • Letter: W

Question

Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:


The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends.

1.

Required information

Based on the preceding information, what is First's contribution to consolidated net income for 20X9?

a. $80,000

b. $100,000

c. $90,000

d. $50,000

Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:


Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8.

2.

Required information

Based on the preceding information, what is the total noncontrolling interest reported in the consolidated balance sheet as of January 1, 20X8?

a. $80,000

b. $40,000

c. $50,000

d. $60,000

3.

Required information

Based on the preceding information, what is the total stockholders' equity reported in the consolidated balance sheet as of January 1, 20X8?

a. $450,000

b. $530,000

c. $490,000

d. $370,000

4.

Required information

Based on the preceding information, what amount is reported as preferred stock outstanding reported in the consolidated balance sheet as of January 1, 20X8?

a. $0

b. $40,000

c. $50,000

d. $44,000

Total Assets $600,000 Total Liabilities $90,000 Preferred Stock 100,000 Common Stock 150,000                 Retained Earnings    260,000 Total Assets $600,000 Total Liabilities and Equities $600,000

Explanation / Answer

Part A)

Winner and First

1)

$100,000 (which is Option B)

____________

Explanation:

The entire amount of net income of $100,000 earned by First for the year 2009 will be considered as a part of the consolidated income and will get distributed between controlling and non-controlling interest in the relevant proportion.

________________

Part B)

Micron and Stanley

2)

The value of non-controlling interest can be calculated with the use of following formula:

Value of Non-Controlling Interest = (Common Stock of Stanley + Retained Earnings of Stanley)*Non-Controlling Interest Percentage in Common Equity + Preferred Stock*Non-Controlling Interest Percentage in Preferred Equity

____________

Using the values provided in the question, we get,

Value of Non-Controlling Interest = (100,000 + 60,000)*25% + 100,000*(1-60%) = $80,000 (which is Option A)

____________

3)

The value of stockholder's equity can be calculated with the use of following formula:

Stockholder's Equity = Controlling Interest + Non Controlling Interest

Where Controlling Interest = Micron's Common Stock + Micron's Retained Earnings

____________

Using the information provided in the question and value of NCI calculated in Part 2, we get,

Stockholder's Equity = (200,000 + 250,000) + 80,000 = $530,000 (which is Option B)

____________

4)

0 (which is Option A)

____________

Explanation:

The preferred shares of the subsidiary company get eliminated in the process of preparing the consolidated financial statements. Therefore, the value of outstanding preference shares in the the consolidated balance sheet will be 0.

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