On July 1, 2016, Gupta Corporation bought 25% of the outstanding common stock of

Question

On July 1, 2016, Gupta Corporation bought 25% of the outstanding common stock of VB Company for $100 million cash. At the date of acquisition of the stock, VB’s net assets had a total fair value of $350 million and a book value of $220 million. Of the $130 million difference, $20 million was attributable to the appreciated value of inventory that was sold during the last half of 2016, $80 million was attributable to buildings that had a remaining depreciable life of 10 years, and $30 million related to equipment that had a remaining depreciable life of 5 years. Between July 1, 2016, and December 31, 2016, VB earned net income of $32 million and declared and paid cash dividends of $24 million. Record the amortization of the differential??? answer is not 8.5.

Explanation / Answer

Part:A

A: Price paid for investment by gupta corp.(25% share) = $100 million

B: Gupta's corp share of book value of net asset = $55 million ($220*25%)

C:Excess of purchase price = $45 million

D: Exess allocated to Inventory (20 million*25%) = $5 million

E: Exess allocated to Building (80 million*25%) = $20 million

F: Exess allocated to Equipment (30 million*25%) = $7.5 million

G: Goodwill = $12.5 million

Part B:

Amortization Schedule:

Items   Differential Remaining useful life   Amortization

Inventory $5 million Sold in same year Nil

Building $20 million 10 years $2 million

Equipment $7.5 million 5 years $1.5 million

Goodwill $12.5 million Not relevant Nil

Total $3.5 million

Jornal Entry

Equity income from VB company Dr $3.5 million (Amortization of differential)

Investment in VB comapny Cr $ 3.5 million

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