On January 1, 2009, Tree Company acquired 70 percent of Limb Company’s outstanding voting stock for $252,000. Limb reported a $300,000 book value and the fair value of the noncontrolling interest was $108,000 on that date. Subsequently, on January 1, 2010, Limb acquired 70 percent of Leaf Company for $91,000 when Leaf had a $100,000 book value and the 30 percent noncontrolling interest was valued at $39,000. In each acquisition, any excess acquisition-date fair value over book value was assigned to a trade name with a 30-year life.
These companies report the following financial information. Investment income figures are not included.

Assume that each of the following questions is independent:
a. If all companies use the equity method for internal reporting purposes, what is the December 31, 2010, balance in Tree’s Investment in Limb Company account?
b. If all companies use the initial value method to account for their investments, what adjustments must Limb and Tree make to their beginning Retained Earnings balances on the 2011 consolidation worksheet?
c. What is the consolidated net income for this business combination for the year of 2011 prior to any reduction for the noncontrolling interests’ share of the subsidiaries’ net income?
d. What is the noncontrolling interests’ share of the consolidated net income in 2011?
e. Assume that Limb made intra-entity inventory transfers to Tree that have resulted in the following unrealized gains at the end of each year:
Date ...... Amount
12/31/09 .... $10,000
12/31/10 ... 16,000
12/31/11 .. 25,000
What is the realized income of Limb in 2010 and 2011, respectively?
f. In assuming the same unrealized profits as presented in part (e), what worksheet adjustment must be made to Tree’s January 1, 2011, Retained Earnings account if that company has applied the initial value method to itsinvestment?

  • CreatedOctober 04, 2014
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