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

Question

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010 Demers reported common stock of S300,000 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: 2011 $100,000 $120,000 50,000 2012 $130,000 60,000 2010 Net income Dividends 40,000 Assume the initial value method is applied. 23. How much does Pell record as Income from Demers for t he year ended December 31, 2011? 24. Ho w much does Pell record as Income from Demers for the year ended December 31, 20122

Explanation / Answer

23) Pell company will record only its share of dividend as income for the year ended December 31,2010.

Income Recorded = $40,000*80% = $32,000

24) Pell company will record only its share of dividend as income for the year ended December 31, 2011

Income to be recorded = $50,000*80% = $40,000

25) Non Controlling interest in the net income of Demers at December 31, 2010

[$100,000 - ($70,000/10)]*20% = $18,600

(The increase in value of Building and Equipment amounting to $70,000 has a remaining useful life of 10 years. This amount of $70,000 should be written off over 10 years equally(i.e. $7,000) from the income of company.)

26) Similarly, Non Controlling interest in the net income of Demers at December 31, 2011 is calculated as follows:-

[$120,000 - ($70,000/10)]*20% = $22,600

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