Question

Big Company acquires 90 percent of Little Company on January 1, Year One. On that date, Little has unpatented technology that has not previously been recorded but is worth $100,000. It should have a life of five years. In addition, goodwill of $40,000 is recognized. By the end of Year One, Little reports net income for the period of $300,000. What amount should be recognized on the Year One financial statements as the noncontrolling interest in the net income of Little?

A) Zero

B) $27,900

C) $28,000

D) $30,000

Answer 1

C) $28,000

Reason- In the consolidation process, the amount allocated to the unpatented technology must be amortized.
That amount will be $20,000 per year ($100,000 divided by five years). Conversely, goodwill is no longer amortized but rather checked annually for impairment. Thus, from a consolidation perspective, the income attributed to the subsidiary is $280,000 ($300,000 reported net income less amortization for the year of $20,000). The outside ownership (the noncontrolling interest in Little) holds 10 percent of the outstanding shares. Therefore, the noncontrolling interest in the net income of Little for this year is $28,000 ($280,000 times 10 percent).