Question

On January 1, 2019, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc., for $612,000 cash. The acquisition-date fair value of the noncontrolling interest was $68,000. At January 1, 2019, Star’s net assets had a total carrying amount of $476,000. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $71,200. Any remaining excess fair value over book value was attributed to a customer list developed by Star (four-year remaining life), but not recorded on its books. Star recorded net income of $62,300 in 2019 and $71,200 in 2020. Each year since the acquisition, Star has declared a $17,800 dividend. At January 1, 2021, Pride’s retained earnings show a $222,500 balance.

Selected account balances for the two companies from their separate operations were as follows:

	Pride			Star
2021 Revenues	$	443,300		$	253,800
2021 Expenses		311,800			173,700

a) What is consolidated net income for 2021?

b) Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2021, consolidated balance sheet?

Answer 1

a)

Excess fair value over book value = 612,000 + 68,000 - 476,000 = 204,000

Amortization of equipment = 71,200/8 = 8,900

Amortization of customer list = (204,000 - 71,200)/4 = 33,200

Total excess amortization = 33,200 + 8,900 = 42,100

Consolidated net income = (443,300 + 253,800) - (311,800+173,700+42,100) = 169,500

b)

The amount of retained earnings would pride report on its January 1,2021 consolidated balance sheet ,

Retained earnings $222,500

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