Big Company acquires 90 percent of Little Company on January 1, Year One. On tha

Question

Big Company acquires 90 percent of Little Company on January 1, Year One. On that date, Little has unpatented technology that has not previously been recorded but is worth $100,000. It should have a life of five years. In addition, goodwill of $40,000 is recognized. By the end of Year One, Little reports net income for the period of $300,000. What amount should be recognized on the Year One financial statements as the noncontrolling interest in the net income of Little?

A) Zero

B) $27,900

C) $28,000

D) $30,000

Explanation / Answer

C) $28,000

Reason- In the consolidation process, the amount allocated to the unpatented technology must be amortized.
That amount will be $20,000 per year ($100,000 divided by five years). Conversely, goodwill is no longer amortized but rather checked annually for impairment. Thus, from a consolidation perspective, the income attributed to the subsidiary is $280,000 ($300,000 reported net income less amortization for the year of $20,000). The outside ownership (the noncontrolling interest in Little) holds 10 percent of the outstanding shares. Therefore, the noncontrolling interest in the net income of Little for this year is $28,000 ($280,000 times 10 percent).

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