Fizer Pharmaceutical paid $85 million on January 2, 2018, for 5 million shares o

Question

Fizer Pharmaceutical paid $85 million on January 2, 2018, for 5 million shares of Carne Cosmetics common stock. The investment represents a 20% interest in the net assets of Carne and gave Fizer the ability to exercise significant influence over Carne’s operations. Fizer received dividends of $3 per share on December 21, 2018, and Carne reported net income of $35 million for the year ended December 31, 2018. The fair value of Carne’s common stock at December 31, 2018, was $35.50 per share. The book value of Carne's net assets was $210 million. The fair value of Carne's depreciable assets exceeded their book value by $50 million. These assets had an average remaining useful life of ten years. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Investee Net Assets Ownership Interest Net Assets Difference Purchased ($ in millions) Purchase Price Fair Value Carne's assets Book Value Carne's assets Attributable to: $85 Depreciation adjustment: Years Adjustment Investment revenue

Explanation / Answer

Solution :-

* $210 + $50 = $260

Journal Entries :-

Particulars Investee Net Assets Ownership Interest Net Assets Purchased Difference Purchase Price $85 Fair Value Carne's Assets $260* * 20 % = $52 Goodwill =$33 Book Value Carne's Assets $210 * 20 % = $42 Undervaluation of Assets = $10

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