Corporate Reporting and Financial Analysis
Prof Wang Jiwei
HOMEWORK #4 Suggested Solutions
Question 1 Intercorporate Equity Investments
Revsine et al., Chapter 16, P16-1, P16-3, P16-7, P16-8, P16-11.
P16-1. Equity method accounting
Investment income reported by Figland:
Figland’s equity in Irene’s earnings (40% x $600,000) $240,000
Amortization of excess paid over book value for:
Depreciable assets ($150,000/10 yrs.) (15,000)
Investment income for 2011 $175,000
Balance in investment in Irene Company on 12/31/11:
Cost of initial investment $1,800,000
Investment income [see requirement (1)] ...view middle of the document...
Note that total noncontrolling interest is $225,000 ($178,000 (a) + $47,000 (c)), which equals 20% of Starmont’s full implied fair value of $1,125,000 ($900,000/.8). (the grossing up method is not appropriate in practice and it is mainly for teaching purpose)
Total goodwill is $235,000 ($188,000 (b) + $47,000 (c)), which is the difference between Starmont’s $1,125,000 implied full fair value and its $890,000 book value (which equals fair value of identifiable net assets).
Full goodwill = Full Fair Value – Fair value of identifiable net assets = 1,125,000 – 890,000 (fv=bv according to the question) = 235,000.
The December 31, 2011 consolidated balance sheet workpaper is on the following page.
Note: the above calculation is based on full goodwill method which is allowed under both the IFRS/FRS and USGAAP. We also talked about partial goodwill method which is allowed by IFRS/FRS only.
| | Pate | Starmont | | Consolidated |
| | | |Eliminations | |
| | | | Dr | Cr | Balance Sheet |
| Assets | | | | | |
| Current assets | $ 400,000 | $ 300,000 | | |$700,000 |
| | | | | | |
| Long term assets |1,000,000 |860,000 | | |1,860,000 |
| | | | | | |
| Investment in Starmont | 900,000 | | |$ 712,000 A | - |
| | | | |188,000 B | |
| Goodwill | | | $ 188,000 B | | 235,000 |
| | | |47,000 C | ...