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On December 31, 20X8, Mercury Corporation acquired 80 percent ownership of Saturn Corporation. On that date,...

On December 31, 20X8, Mercury Corporation acquired 80 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $400,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $250,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $20,000 and inventories which had decreased by $5,000.

Based on the preceding information, what amount will be the differential, if the acquisition price was $320,000?

Zero

$75,000

$100,000

$20,000

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Answer #1

In the given case, Mercury Corporation aquired and hold ownership of Saturn Corporation for 80% as specified.

The Value of reported Assets is $400000, while liability is $100000

As Net Asset Value = Assets - Outside Liabilities

So the current Net Assets Value of Saturn Corporation is net of Assets over liabilities i.e. $400000-$100000= $300000.

The Land value appreciation post aaquisition will not be considered. However, The Investory change will be considered. Therefore Inventory decrease by $ 5000 should be added back to Net Value of Assets derived above to recalculate the Net Assets Value purchased on the date of aquisition.

Therefore Recalculated NAV = ($300000x 80%) + $5000 = $ 245000

So, Differential Amount is Aquisition Value over Recalculated NAV purchased i..e. $320000 - $245000 = $ 75000

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