Question

On April 1, 2018, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2018, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2018, and paid total dividends for the year $10,000; these dividends were issued quarterly. BigBen's investment in LittleTick will affect BigBen's 2018 net income by:

A) A loss of $10,500.

B) Earnings of $4,500.

C) Earnings of $1,125.

D) Earnings of $3,450.

Answer 1

Big Ben acquired 30% shares of Little Tick on 1 April ,2018 and hence Big Ben entitled to receive 30% of the profits of the Little Trick earned .

Big Ben acquired Little Tick on 1^st April ,it has the right to receive 30% of the net income for nine months.

Now with respect to compensation for acquisition, it is given that Big Ben paid extra $40,000 out of which $15,000 is attributed to the difference in the inventory that will be sold in 2018.

Hence , Big Ben stands at a loss position if we calculate its earnings from Little Tick in 2018:

Earnings from Little Tick = 20,000 * 30/100 * 9/12 = $4,500

Compensation paid above the book value and goodwill = $15,000

Loss = $4,500 - $15,000 = ($10,500)

Big Ben's investment in Little Tick will affect Big Ben's 2018 net income by loss ($10,500).

Hence, option A) A loss of $10,500 is the correct answer.

answered by: anonymous