HOW DO THEY GET THE HISTORICAL COST OF 2017? Assume that Top Company acquires 80

Question

HOW DO THEY GET THE HISTORICAL COST OF 2017?

Assume that Top Company acquires 80 percent of the voting stock of Bottom Company on January 1, 2017. The parent pays $400,000 and the acquisition-date fair value of the noncontrolling interest is $100,000. Top allocates the entire $50,000 excess fair value over book value to adjust a database owned by Bottom to fair value. The database has an estimated remaining life of 20 years. Top Company applies the equity method to its investment in Bottom. The subsidiary reports net income of $30,000 in 2014 and $70,000 in 2015, the current year. The subsidiary declares dividends of $20,000 in the first year and $50,000 in the second. After the takeover, intra-entity inventory transfers between the two companies occurred as shown in Exhibit 5.2 A $10,000 intra-entity receivable and payable also exists as of December 31, 2015 2017 $80,000 60,000 $20,000 $16,000 2018 Transfer prices $100,000 70,000 $30,000 Inventory remaining at year-end (at transfer price) $20,000 25% 30% Gross profit remaining in year-end inventory $ 4,000 $6,000

Explanation / Answer

Ans: Historical cost here is considered as the actual cost of the transfer which are being already recorded in the books. It is being reduced from the transfer value to compute the gross profit earned on the intercompany transfers

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