2. Proportionate versus Fair Value In 2010, Company A is formed with $630,000 in

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2. Proportionate versus Fair Value

In 2010, Company A is formed with $630,000 in capital from the sale of 21,000 shares at $30 a share. Company A, which has no other operations, immediately acquires 60% of the voting stock of Company S for $630,000. Company S is a business whose fair value of identifiable net assets on the date of Company A’s acquisition is $700,000. This amount includes a $30,000 premium that was paid to gain control of Company S. The fair value of the 40% noncontrolling interest is $400,000.

Required
(a) Show journal entries to record Company A’s investment in Company S under the proportionate method and the fair-value method.
(b) Depending on the method utilized, how would the financial statements be impacted?
(c) Which method provides a better reflection of the underlying transactions? Provide support for your answer.

Explanation / Answer

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