On January 1, 2012, Uncle Company purchased 80 percent of Nephew Company\'s capi

ID: 2611268 • Letter: O

Question

On January 1, 2012, Uncle Company purchased 80 percent of Nephew Company's capital stock for $660,000 in cash and other assets. Nephew had a book value of $790,000 and the 20 percent noncontrolling interest fair value was $165,000 on that date. On January 1, 2011, Nephew had acquired 30 percent of Uncle for $334,000. Uncle's appropriately adjusted book value as of that date was $1,080,000 Separate operating income figures (not including investment income) for these two companies follow. In addition, Uncle declares and pays $30,000 in dividends to shareholders each year and Nephew distributes $4,000 annually. Any excess fair-value allocations are amortized over a 10-year period. Uncle Nephew Year Company Company 2012 $101,000 S 42,600 2013 180,000 48,600 2014 219,000 55,800 a. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary's income recognized by Uncle in 2014? Subsidiary income recognized b. What is the noncontrolling interest's share of 2014 consolidated net income? Noncontrolling interest's share of income

Explanation / Answer

a. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary’s income recognized by Uncle in 2014?

Consideration transferred by Uncle

$ 660000

Noncontrolling interest fair value

165000

Nephew's business fair value

$ 825000

Book value

(790000)

Intangible assets

$ 35000

Life

10 years

Amortization expense (annual)

$ 3500

Net income reported by Nephew—2014

$ 55800

Amortization expense

(3500)

Accrual-based net income

52300

Uncle's ownership percentage

80%

Net income of subsidiary recognized by Uncle

$ 41,840

b. What is the noncontrolling interest’s share of 2014 consolidated net income?

To the outside owners, the intra-entity dividends = ($30000 × 30%) = $9000 declared by Uncle are income, because the book value of Nephew is increasing. Thus, the noncontrolling interest's share of consolidated net income is computed as follows:

Nephew’s accrual-based 2014 net income (above)

$ 52300

Dividends declared by Uncle to Nephew

9000

Income to outside owners

$ 61,300

Noncontrolling interest percentage

20%

Noncontrolling interest share of consolidated net income

12260