Question

Posit Company has a financial relationship with Sparkle Inc., a separate legal entity, but does not...

Posit Company has a financial relationship with Sparkle Inc., a separate legal entity, but does not own any of Sparkle's voting stock. On January 1, 2020, Posit determines that Sparkle is a variable interest entity and that Posit is Sparkle's prime beneficiary. Sparkle's shareholders' equity on January 1, 2020 is as follows:

Capital stock

$3,000

Retained deficit

(500)

Total

$2,500


Sparkle's net assets are reported at values approximating fair value, but it has previously unreported identifiable intangible assets valued at $7,000. The fair value of Sparkle at January 1, 2020 is $16,000.

Assume Posit and Sparkle were already under common control. On a January 1, 2020 consolidated balance sheet, goodwill is reported at:

A.

$16,000
B.

$10,000
C.

$13,500
D.

$0
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Answer #1

Answer A 16,000.

Variable interest Entity in which control over other entity achieved through arrangements that do not involve ownership or voting rights.

Variable interest entity is consolidated by the primary beneficiary which is the enterprise that has the power to direct significant activities of the Variable Interest entity.

In given question posit and sparkle are under common ownership. So consolidated of financial statements will be done.

In case of consolidation full value of unreported identified intangible assets will be shown in the balance sheet.

Now fair value of intangible asset is $16,000

Based on general rule of consolidation entire $16,000 will be reported as goodwill

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