On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000

Question

On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2014.

Explanation / Answer

Computation of Good Wili:

Cash paid for stock $477,000
Stockholders' equity
(140,000+280,000)*.90                                   $ (378,000)
Goodwill $99,000

Computation of Income to be reported in Consolidated income statement

Year 2014 2015

Income from Techron $ 98,000                           $126,000
Share of Jannison            (90%) $88,200 $ $113,400
Less dividends received (90% of 42,000) $( 37,800) $ (37,800)
Increase in parent's retained earnings $40,400 $ 75,600
Parent Company net income $308,000 $364,000
Annual Amortization $ 11,000                                $11,000
Consolidated Net Income $337,400                              $428,600

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