Exercise 5-9 On January 1, 2013, Point Corporation acquired an 80% interest in S
ID: 2528083 • Letter: E
Question
Exercise 5-9 On January 1, 2013, Point Corporation acquired an 80% interest in Sharp Company for $1,999,000. At that time Sharp Company had common stock of $1,499,000 and retained earnings of $713,000. The book values of Sharp Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land had a fair value of $100,000 and a book value of $82,000. The outstanding bonds were issued at par value on January 1, 2008, pay 11% annually, and mature on January 1, 2018. The bond principal is $503,000 and the current yield rate on similar bonds is 990 Prepare a Computation and Allocation Schedule for the difference between book value and the value implied by the purchase price in the consolidated statements workpaper on the acquisition date. (Round present value factor calculations to 5 decimal places, e.g. 1.25136 and final answers to o decimal places, e.g. 5,125.) Parent Share Non Controlling Share Entire Value Purchase Price and Implied Value Less : Book Value of Equity Acquired Difference between Implied and Book Value # Land Premium on Bonds Payable Balance Goodwill BalanceExplanation / Answer
Parent share
Non-controlling interests
Entire value
Purchase price (1999000 x 20/80)
1999000
499750
2498750
Less: Book value of equity acquired (Note 1)
1769600
442400
2212000
Difference between implied and book value
229400
57350
286750
Land
14400
3600
18000
Premium on bond payable
51649.31
12912.33
64561.64
Balance
192150.7
48037.67
240188.4
Goodwill
266649.3
66662.33
333311.6
Balance
-74498.6
-18624.7
-93123.3
Note 1:
Common stock
1499000
Retained earnings
713000
2212000
Share of parent (2212000 x 80/100)
1769600
Non-controlling share (2212000 x 20/100)
442400
Note 2:
Land undervalued (100000 - 82000)
18000
Share of parent (18000 x 80/100)
14400
Non-controlling share (18000 x 20/100)
3600
Note 3:
Bond present value
Annual interest on bond (503000 x 11%)
55330
Year
Interest
Principal
Total outflow
PV factor @9% pa.
Present value of cash outflow
1
55330
55330
0.917431
50761.47
2
55330
55330
0.84168
46570.15
3
55330
55330
0.772183
42724.91
4
55330
55330
0.708425
39197.17
5
55330
55330
0.649931
35960.7
6
55330
55330
0.596267
32991.47
7
55330
55330
0.547034
30267.4
8
55330
55330
0.501866
27768.26
9
55330
55330
0.460428
25475.47
10
55330
503000
558330
0.422411
235844.6
Present value of bond
567561.6
Premium on bond
Present value of bond
567561.6
Less: Principal value of bond
503000
Premium on bond
64561.64
Share of parent (64561.64 x 80%)
51649.31
Non-controlling share (64561.64 x 20%)
12912.33
Goodwill calculation
Purchase price
1999000
Less: Share of net assets
1732351
Goodwill
266649.3
Share of net assets
Book value of shares
1499000
Add: retained earnings
713000
2212000
Add: Undervaluation of land (100000 -82000)
18000
2230000
Less: Premium on bond
64561.64
Total net asset
2165438
Share of parent (2165438 x 80%)
1732351
Non-controlling share (2165438 x 20%)
433087.7
Parent share
Non-controlling interests
Entire value
Purchase price (1999000 x 20/80)
1999000
499750
2498750
Less: Book value of equity acquired (Note 1)
1769600
442400
2212000
Difference between implied and book value
229400
57350
286750
Land
14400
3600
18000
Premium on bond payable
51649.31
12912.33
64561.64
Balance
192150.7
48037.67
240188.4
Goodwill
266649.3
66662.33
333311.6
Balance
-74498.6
-18624.7
-93123.3