Pennack Corporation purchased 75% of the outstanding stock of Shing Corporation

Question

Pennack Corporation purchased 75% of the outstanding stock of Shing Corporation on January 1, 2014 for $300,000 cash. At the time of the purchase, the book value and fair value of Shing's assets and liabilities were equal. Shing's balance sheet at the time of acquisition and December 31, 2014 are shown below.

                                            Jan 1, 2014           Dec 31, 2014
Cash                                    $75,000                   80,000
Other current assets             175,000                   160,000
Plant Assets — net        250,000                   240,000
  Total assets                          500,000                   480,000

Liabilities                                 100,000                   50,000
Capital stock                          100,000                   100,000
Retained earnings           300,000                   330,000
  Total liabilities and equity 500,000                   480,000

Shing earned $60,000 in income during the year and paid out $30,000 in dividends. Pennack uses the equity method to account for its investment in Shing.

Part 1: Calculate Pennack's net income from Shing in 2014.

Part 2: Calculate the noncontrolling interest share in Shing's income for 2014.

Part 3: Calculate the balance in the Investment in Shing’s account reported on Pennack's separate general ledger at December 31, 2014.

Part 4: Calculate the noncontrolling interest that will be reported on the consolidated balance sheet at December 31, 2014.

Explanation / Answer

1: Shing's net income of $60,000 × 75% = 45,000

2: Shing's net income of $60,000 × 25% = 15,000  

3: Initial investment of $300,000 + Pennack's share of Shing's income $45,000 - dividends received from Shing $22,500 = $322,500

4: Beginning noncontrolling interest $100,000 + noncontrolling interest in income $15,000 - noncontrolling dividends $7,500 = 107,500

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