Question

In a business combination with a 23% NCI, where there are UNDERVALUED Current Assets by $2,000,000 and UNDERVALUED Current Liabilities by $1,000,000. What would be the appropriate Equity method, and consolidation entries to account for amortization expense (if any, and why or why not?)?

Answer 1

The Net Assets based on undervalued current assets and current liabilities = $ 2,000,000 - $ 1,000,000 = $ 1,000,000

In this case, the appropriate equity method to account for 23% NCI would be proportionate share of identifiable Net Assets, as calculated above.

Hence, NCI in this case = 23% of $ 1,000,000 = $ 230,000

Assuming that purchase consideration is paid based on book value of assets (i.e. Undervalued assets and liabilities), goodwill for 77% controlling interest = $ 770,000

Earlier such goodwill was subject to amortisation periodically over a certain number of years (by debiting statement of income), however, as per the current standards, it is tested for impairment periodically and if found to be impaired, an impairment loss is booked.

In this case, since no information is given, no amortisation expense shall be booked.