Week 4 - BLT Questons - Key (new)

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Feb 20, 2024

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4.10 In-Class Example: Goodwill, Amortization, and Allocation Schedules – Part 2 4.6.3 : Why can't we simply allocate goodwill to the parent and the NCI based on their percentage ownership of the subsidiary? Answer: Goodwill is basically a premium paid above the FV of net identifiable assets over the BV of the subsidiary. When the parent company acquires less than 100% of the subsidiary, it often pays more than the market price of stocks being traded, which creates two different prices for the same stock. As the FV of stocks acquired (let’s say $10 for the 90% ownership) and the FV of stocks held by NCI (let’s say $8 for the remaining 10) are different, Goodwill for the CI shares ($10 – the BV of sub) and Goodwill for the NCI shares ($8 – the BV of sub) will be different as well. On January 1, 2016, Polk Corporation and Strass Corporation had condensed balance sheets as follows: Polk Strass Current assets $70,000 $20,000 Noncurrent assets 90,000 40,000 Total assets $160,000 $60,000 Current liabilities 30,000 10,000 Long-term debt 50,000 -- Stockholder’s equity 80,000 50,000 Total liabilities and stockholder’s equity $160,000 $60,000 On January 2, 2016, Polk borrowed $60,000 and used the proceeds to purchase 90 percent of the outstanding common shares of Strass. This debt is payable in 10 equal annual principal payments, plus interest, beginning December 30, 2016. The excess cost of the investment over Strass’s book value of acquired net assets should be allocated 60 percent to inventory and 40 percent to goodwill. On January 1, 2016, the fair value of Polk shares held by noncontrolling parties was $10,000. (ch4 :P(17-21, 13 Ed) Below I calculate each balance without the worksheet. The worksheet I prepared will help you see how the numbers are added to get the consolidated total.

FV Allocations Consideration Transferred 60,000 90% FV NCI 10,000 10% Acquisition Date FV 70,000 BV Net Assets Acquired 50,000 Excess FV over BV 20,000 Inventory 12,000 Goodwill 8,000 4.10.5. On Polk’s January 2, 2016, consolidated balance sheet, current assets should be: $90,000 / $99,000 / $100,000 / $102,000 ( Ans: consolidated current assets = CA(P) + CA(S) + Excess FV of Inventory = 70K + 20K + 12K = 102,000 ) 4.10.6. On Polk’s January 2, 2016, consolidated balance sheet, noncurrent assets should be: $130,000 / $136,000 / $138,000 / $140,000 ( Ans: consolidated noncurrent assets = NCA(P) + NCA(S) = (90K + 40K + 8K = 138,000. Please note that goodwill after the acquisition is part of noncurrent assets ) 4.10.7. On Polk’s January 2, 2016, consolidated balance sheet, current liabilities should be: $50,000 / $46,000 / $40,000 / $30,000 ( Ans: consolidated current liabilities = CL(P) + CL(S) = (30K + 6K) + 10K = 46,000 . Please note that out of newly issued debt of $60,000, $6,000 is current and $54,000 is long-term.) 4.10.8. On Polk’s January 2, 2016, consolidated balance sheet, noncurrent liabilities should be: $115,000 / $109,000 / $104,000 / $55,000 ( Ans: consolidated noncurrent liabilities = NCL(P) + NCL (S) = (50K + 54K) = 104,000 . Please note that out of newly issued debt of $60,000, $6,000 is current and $54,000 is long-term.) 4.10.9. On Polk’s January 2, 2016, consolidated balance sheet, stockholder’s equity including noncontrolling interests should be: $80,000 / $85,000 / $90,000 / $130,000 ( Ans: Consolidated stockholder’s equity = S.E (Parent) + NCI = 80,000 + 10,000 = 90,000 ) Please see the worksheet attached below.

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