For the past 10 years, Prince Company (Prince) has owned 75,000 or 75% of the common shares of Stiff Inc. (Stiff). Elizabeth Winer owns another 20% and the other 5% are widely held. Although Prince has the controlling interest, you would never know it during the annual shareholders' meetings. Winer keeps the board of directors on its toes by asking a lot of tough questions and continually threatening legal action if her rights as a minority shareholder are not protected.
Rick Impatient owns 100% of the shares of Prince. After Prince's latest share holders' meeting, he decided that Prince would offer to purchase Winer's shares in Stiff or Prince would sell its interest in Stiff as Impatient was tired of all of the heckling from Winer. The shares of Stiff were recently trading for $100 per share.
On November 13, Year 13, Prince offered to pay $108 per share to Winer for her 20% interest in Stiff. To Impatient's surprise, Winer accepted the offer and the transaction was consummated on December 31, Year 13. At December 31, Year 13, the unamortized acquisition differential relating to prior purchases by Prince was $500,000, which pertained solely to goodwill. On the closing date, the shares of Stiff had a carrying amount of $70 per share and all identifiable net assets had a fair value equal to carrying amount except for unrecognized patents, which had a fair value of $1.3 million and an estimated useful life of four years.
The CFO of Prince wants to recognize the entire acquisition differential related to the new purchase from Winer as goodwill in order to minimize the impact on earnings for Years 13 and 14. The controller, on the other hand, believes that some of the acquisition differential should be charged to income in Year 13 as a loss because of the excessive price paid for the shares.
Required:
How would you resolve the dispute? Provide the arguments to support your position, and indicate the impact of your decision on consolidated profit attributable to Prince's shareholders for Years 13 and 14. State your assumptions.