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Exam 5: Appendix A: Step Purchases

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Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000. - Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?

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On January 1, 20X7, Water Limited purchased 700,000 shares of Bottle Inc. for $2.8 million. On January 1, 20X9, Water purchased another 200,000 shares of Bottle for $950,000. During the entire period, Bottle had 1,000,000 shares outstanding. Water accounts for its investment in Bottle under the equity method. The following information was extracted from the financial records of Bottle. January 1, 20X7 January 1, 20X9 December 31, 20X10 Net carrying value of buildings \ 3,560,000 3,320,000 3,320,000 Fair value of the buildings \ 4,760,000 4,804,000 4,804,000 Remaining useful life of buildings 30 28 27 Common shares \ 1,000,000 \ 1,000,000 \ 1,000,000 Retained earnings \ 1,500,000 1,820,000 2,200,000 All net identifiable assets had a fair value equal to their carrying value on the date of acquisition except the buildings. There is no goodwill reported on the separate entity financial statements of Water or Bottle. There have been no intercompany transactions between Water and Bottle. Required: Calculate the balances of the following accounts on the consolidated statement of financial position at December 31, 20X10, under the entity method: a. Goodwill b. NCI Determine the adjustment to equity required for the second acquisition.

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Building Fair value increment Amortization per year: Fair value increment =\$ 1,200,000 / 30=\$ 40,000 annually. a. \begin{array}{|l|l|} \hline \text {Goodwill as calculated } & \$300,000\\ \hline \end{array} b. \begin{array}{|l|l|l|} \hline\text { NCI's } 30 \% \text { value of Bottle based on purchase } & & \\ \text { price-January } 1,20 \times 7 & & \$ 1,200,000 \\ \hline \text { Add: Increase in retained earnings Jan 1, 20X7, } & & \\ \text { to Jan } 1,20 \times 9 & \$ 320,000 & \\ \hline(\$ 1,820,000-\$ 1,500,000) & \\ \hline \text { FVA Amortizations-20X7-20X9 } & & \\ \hline \text { Building }(\$ 40,000 \times 3) & \underline{(120,000)} & \\ \hline & \underline{\$ 200,000} & \\ \hline \text { NCI's portion of adiusted earnings at } 30 \% & & 60,000 \\ \hline \text { NCI balance updated and adjusted to Jan. 1, } \\ 20 \times 9&& 1,260,000 \\ \hline\text { Less value of } 20 \% \text { of Bottle transferred to Water } \\ {[\$ 1,260,000 \times(20 \% / 30 \%)]}& & (840,000) \\ \hline \text { Value of } 10 \% \mathrm{NCI} \text { as of Jan. } 1,20 \times 9 && 420,00 \\ \hline \text { Add: Increase in retained earnings Jan 1, 20X9, } \\ \text { to Dec 31, 20X10 } & & \\ \hline(\$ 2,200,000-\$ 1,820,000) & 380,000 & \\ \hline \text { Amortizations }-20 \times 9-20 \times 10 & & \\ \hline \text { Building } 540,000 \times 2 & (80,000) & \\ \hline & \$ 300,000 & \\ \hline \text { NCI's portion of adjusted earnings at } 10 \% & & 30,000 \\ \hline \text { NCI balance, Dec. } 31,20 \times 9 & & \$ 450,000 \\ \hline \end{array} Adjustment to equity: \begin{array}{lr} \text { Fair value of consideration transferred by Water, January 1, 20X9 } & \$ 950,000 \\ \text { Change in NCI from } 30 \% \text { to } 10 \% \text { as above } &\underline{ (840,000) }\\ \text { Negative adjustment to equity } &\underline{ \underline{ \$ 110,000}} \end{array} Building Fair value increment Amortization per year:
Fair value increment =$1,200,000/30=$40,000 =\$ 1,200,000 / 30=\$ 40,000 annually.
a.
Goodwill as calculated $300,000\begin{array}{|l|l|} \hline \text {Goodwill as calculated } & \$300,000\\ \hline \end{array}
b.
 NCI’s 30% value of Bottle based on purchase  price-January 1,20×7$1,200,000 Add: Increase in retained earnings Jan 1, 20X7,  to Jan 1,20×9$320,000($1,820,000−$1,500,000) FVA Amortizations-20X7-20X9  Building ($40,000×3)(120,000)‾$200,000‾ NCI’s portion of adiusted earnings at 30%60,000 NCI balance updated and adjusted to Jan. 1, 20×91,260,000 Less value of 20% of Bottle transferred to Water [$1,260,000×(20%/30%)](840,000) Value of 10%NCI as of Jan. 1,20×9420,00 Add: Increase in retained earnings Jan 1, 20X9,  to Dec 31, 20X10 ($2,200,000−$1,820,000)380,000 Amortizations −20×9−20×10 Building 540,000×2(80,000)$300,000 NCI’s portion of adjusted earnings at 10%30,000 NCI balance, Dec. 31,20×9$450,000\begin{array}{|l|l|l|}\hline\text { NCI's } 30 \% \text { value of Bottle based on purchase } & & \\\text { price-January } 1,20 \times 7 & & \$ 1,200,000 \\\hline \text { Add: Increase in retained earnings Jan 1, 20X7, } & & \\\text { to Jan } 1,20 \times 9 & \$ 320,000 & \\\hline(\$ 1,820,000-\$ 1,500,000) & \\\hline \text { FVA Amortizations-20X7-20X9 } & & \\\hline \text { Building }(\$ 40,000 \times 3) & \underline{(120,000)} & \\\hline & \underline{\$ 200,000} & \\\hline \text { NCI's portion of adiusted earnings at } 30 \% & & 60,000 \\\hline \text { NCI balance updated and adjusted to Jan. 1, } \\20 \times 9&& 1,260,000 \\\hline\text { Less value of } 20 \% \text { of Bottle transferred to Water } \\{[\$ 1,260,000 \times(20 \% / 30 \%)]}& & (840,000) \\\hline \text { Value of } 10 \% \mathrm{NCI} \text { as of Jan. } 1,20 \times 9 && 420,00 \\\hline \text { Add: Increase in retained earnings Jan 1, 20X9, } \\\text { to Dec 31, 20X10 } & & \\\hline(\$ 2,200,000-\$ 1,820,000) & 380,000 & \\\hline \text { Amortizations }-20 \times 9-20 \times 10 & & \\\hline \text { Building } 540,000 \times 2 & (80,000) & \\\hline & \$ 300,000 & \\\hline \text { NCI's portion of adjusted earnings at } 10 \% & & 30,000 \\\hline \text { NCI balance, Dec. } 31,20 \times 9 & & \$ 450,000 \\\hline\end{array} Adjustment to equity:
 Fair value of consideration transferred by Water, January 1, 20X9 $950,000 Change in NCI from 30% to 10% as above (840,000)‾ Negative adjustment to equity $110,000‾‾\begin{array}{lr}\text { Fair value of consideration transferred by Water, January 1, 20X9 } & \$ 950,000 \\\text { Change in NCI from } 30 \% \text { to } 10 \% \text { as above } &\underline{ (840,000) }\\\text { Negative adjustment to equity } &\underline{ \underline{ \$ 110,000}}\end{array}

Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?

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Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000. - With respect to this addition purchase, which of the following is true?

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Question 4

Dinh Co. acquired 60% of Ludo Ltd. five years ago. In the current year, Dinh purchased additional shares from the NCI to bring its holdings to 75%. How should the difference between the purchase consideration paid and the adjustment to the value of the NCI be treated?

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Question 5

Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000. - Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?

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