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Consolidation Eliminations Several Years after Acquisition Paramount Corporation acquired its 75 percent investment in Sun Corporation...

Consolidation Eliminations Several Years after Acquisition

Paramount Corporation acquired its 75 percent investment in Sun Corporation in January 2012, for $1,455,000 and accounts for its investment internally using the complete equity method. At the acquisition date, total book value of Sun was $750,000 including $400,000 of retained earnings, and the estimated fair value of the 25 percent noncontrolling interest was $395,000. The fair values of Sun's assets and liabilities were equal to their carrying values, except for the following items:

Fair value less Book value
Accounts receivable $(50,000)
Inventory (62,500)
Equipment (10 years, straight-line) (200,000)
Patents (5 years, straight-line) 100,000
Deferred tax liabilities (created as a result of the nontaxable acquisition) 37,500

The receivables were collected and the inventory sold during the first three years following the acquisition. Deferred tax liabilities of $30,000 were reversed during 2012–2017. An impairment test made at the end of 2017 indicates a remaining value of $1,000,000 for the goodwill recognized as a result of the acquisition. Sun's stockholders' equity is $1,250,000 including $900,000 of retained earnings, at the end of 2017.

Required
(a) Calculate the amount of goodwill initially recognized as a result of the acquisition, and its allocation to the controlling and noncontrolling interests.

Allocation of goodwill
Goodwill $Answer
Paramount’s share of goodwill: $Answer
Noncontrolling interest’s share of goodwill $Answer

(b) Calculate the balance in the investment account, carried on Paramount's books, and the value of the noncontrolling interest, reported in the equity section of the consolidated balance sheet, as of the end of 2017.

Balances as of 2017 year-end
Investment in Sun $Answer
Noncontrolling interest in Sun $Answer

(c) Assume eliminating entry (C), to reverse Paramount's equity method entries for 2018, has been made. Prepare 2018 eliminating entries (E) and (R) to adjust Sun's assets to the correct values as of the beginning of 2018, eliminate the remainder of the investment, and recognize the beginning-of-2018 value of the noncontrolling interest.

Consolidation Journal
Description Debit Credit
(E)
AnswerInvestment in SunStockholders' equity-SunEquipment, netCashGoodwill Answer Answer
AnswerEquipment, netInvestment in SunStockholders' equity-SunCashGoodwill Answer Answer
Noncontrolling interest in Sun Answer Answer
(R)
AnswerInvestment in SunStockholders' equity-SunEquipment, netCashGoodwill Answer Answer
Equipment, net Answer Answer
Deferred tax liabilities Answer Answer
AnswerInvestment in SunStockholders' equity-SunEquipment, netCashGoodwill Answer Answer
Noncontrolling interest in Sun Answer Answer
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Homework Answers

Answer #1

a. Calculation of Goodwill.

Fair Value of Sun corp = 395,000 / 25% = $1,580,000

Total share of 75% of Paramount in sun = $1,580,000 x 75% = $1,185,000

Consideration paid to Sun corp = $1,455,000

Total Goodwill allocated to paramount = 1,455,000 - 1,185,000 = $270,000

Goodwill allocated to non-controlling interest = Fair Value in Sun corp - Book Value in sun corp.

= 395,000 - (750,000 x 25%) = $207,500

Total Goodwill = $477,500

Paramount goodwill = 270,000

Non-controlling interest = 207,500

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