Parent Company acquires 80% of the outstanding stock of Subsidiary Company on the open market. They acquired the 8,000 shares by exchanging 2 shares of Parent for each share of Sub. The Parent stock is selling for $40 per share. At the date of acquisition (12-31-2013) Subsidiary had the following condensed balance sheet: (amounts shown at carrying value)
Inventory = $50,000
Other Current Assets = 60,000
Land = $50,000
Building = $500,000
Accumulated Depreciation on Building = 120,000
Equipment = 300,000
Accumulated Depreciation on Equipment = 90,000
Patent = $0 as it was developed internally.
Liabilities = $210,000
Common Stock (10,000 shares $10 par) = 100,000
PIC- Common Stock = 120,000
Retained Earnings = 320,000
Identifiable assets undervalued:
Inventory by $10,000- FIFO; Land $20,000- Building $30,000 (straight line 20 years life- Equipment $20,000 (straight line 5 years) and Patent $10,000 (straight line 10 years life)
Implied value of firm = (8,000 shares x 2 = 16,000 shares of parent x $40) = 640,000 / .8 = 800,000
Book value of net asses = 540,000
Excess of cost over book value = 260,000
Identifiable assets, inventory 10,000 + land 20,000 + building 30,000 + equipment 20,000 + patent 10,000 explained
Balance is goodwill = 260,000 – 90,000 = 170,000
What is the original balance in the non-controlling interest?
What is the implied value of the Sub?
The next year the Sub reported Income of $200,000. Dividends of $50,000 were paid to all stockholders. What is the adjusted income of the Sub?
What is the balance in the Investment in Sub balance at the end of the year?
What will be the total adjustments needed to the reported income of the sub in the second year?