On April 1, 2016, BigBen Company acquired 30% of the shares of LittleTick, Inc.

Question

On April 1, 2016, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $143,000 for the investment, which is $41,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $11,800 of the $41,000 difference to inventory that will be sold in the remainder of 2016, and the rest to goodwill. LittleTick recognized a total of $17,000 of net income for 2016, and paid total dividends for the year $10,700; these dividends were issued quarterly. BigBen's investment in LittleTick will affect BigBen's 2016 net income by (

Earnings of $2,677.

Earnings of $3,825.

A loss of $7,975.

Earnings of $1,148.

Explanation / Answer

Big Ben acquired 30% shares of Little Trick on 1 April ,2016 and hence Big Ben entitled to receive 30% of the profits of the Little Trick earned .

Since Big Ben acquired Little Trick on 1st April ,it has the right to receive 30% of the net income for nine months).

Now with respect to compensation for acquisition, it is given that Big Ben paid extra $41,000 out of which 11800 is attributed to the difference in the inventory that will be sold in 2016.

Hence , Big Ben stands at a loss position if we calculate its earnings from Little Trick in 2016:

Earnings from Little Trick =17000*30/100*9/12=$3825

Compensation paid above the book value and goodwill=11800

Loss=11800-3825=7975

BigBen's investment in LittleTick will affect BigBen's 2016 net income by loss (7975)

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