A subsidiary is acquired on January 1, 2016 at an acquisition cost of $100 milli

Question

A subsidiary is acquired on January 1, 2016 at an acquisition cost of $100 million. The subsidiary’s book value at the date of acquisition was $25 million, consisting of these accounts: Capital stock $ 8,000,000 Retained earnings 18,000,000 Accumulated other comprehensive loss (1,000,000) Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition: Fair Value Book Value Plant assets, net $40,000,000 $25,000,000 Straight-line, 5 yrs Identifiable intangible assets 60,000,000 0 Straight-line, 6 yrs It is now December 31, 2017. The subsidiary reported the following amounts during the period 2016-2018: 2016 2017 2018 Net income $12,000,000 $10,000,000 $15,000,000 Other comprehensive income (loss) 300,000 (160,000) 125,000 The subsidiary did not declare any dividends during this period. Goodwill for this acquisition is not impaired as of the end of 2018. The parent uses the complete equity method to report its investment on its own books. Required Calculate equity in net income, reported on the parent’s books, for 2017.

Explanation / Answer

The Book value of the assets would be as follows :-

$ 25 Mn

The acquisition cost is given by $100 Mn

Total value paid over book value = $100 Mn - $25 Mn = $75 Mn

Now allocation to plant and equipment = Fair value - Book value =$40 Mn - $25 Mn = $15 Mn

So allocation to intangible assets would be = Value paid over book value - Aloocated to plant and equiment

= $75Mn - $15 Mn = $60 Mn (Good will)

Initial Cost = $100 Mn

In 2016 cost would be = $100Mn + $12 Mn +$0.3 Mn = 112.3 Mn

In 2017 cost would be = 112.3 +10-.16 = $122.14

In 2018 cost would be = $122.14 + $15 + $.125

= $137.26

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