Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Dem

Question

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows: Assume the initial value method is applied

2010 2011 2012

Net income 100,000 120,000 130,000

dividends 40,000 50,000 60,000

Compute Pell's investment in Demers at December 31, 2012.

A.

$592,400.

B.

$500,000.

C.

$625,000.

D.

$676,000.

E.

$620,000.

Compute Pell's investment in Demers at December 31, 2010.

A.

$625,000.

B.

$574,400.

C.

$548,000.

D.

$542,400.

E.

$532,000.

Compute the non-controlling interest in Demers at December 31, 2010.

A.

$135,600.

B.

$114,000.

C.

$112,000.

D.

$100,000.

E.

$110,600.

A.

$592,400.

Explanation / Answer

Demers book value Jan 1 2010 Common stock                        300,000 Retained earning                        210,000 Fair value addition Equipment & Building                          70,000 Goodwill                          45,000 Total value of Demers                        625,000 Purchase value for 80%                        500,000 Pell co share   Non Controlling share Fair value addition Equipment & Building                          56,000                                           14,000 Yearly depreciation for 10 yrs                            5,600                                              1,400 Pell Company Non Controlling interest Invetsment in Demers jan 1 2010                        500,000                                         125,000 Year 2010 Add share of Demer profit                          80,000                                           20,000 Less : adjustment for fair vaule depreciation                          (5,600)                                           (1,400) Less : Dividend share                        (32,000)                                           (8,000) Value of Investment in Demers at 2010 end                        542,400                                         135,600 Year 2011 Add share of Demer profit                          96,000                                           24,000 Less : adjustment for fair vaule depreciation                          (5,600)                                           (1,400) Less : Dividend share                        (40,000)                                         (10,000) Value of Investment in Demers at 2011 end                        592,800                                         148,200 Year 2012 Add share of Demer profit                        104,000                                           26,000 Less : adjustment for fair vaule depreciation                          (5,600)                                           (1,400) Less : Dividend share                        (48,000)                                         (12,000) Value of Investment in Demers at 2012 end                        643,200                                         160,800 Pell's investment value in Demers at the end of Dec 31 2012 is $643,200. unfortunately none of the options show the value Pell's investment value in Demers at the end of Dec 31 2010 is $542,400. option D. is correct Non controlling interest in Demers at Dec31 2010 is $135,600. So option A. is correct

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