Implied cost of 100% investment 760,000

Carrying amount of Silk’s net assets = Carrying amount of Silk’s shareholders’ equity

Silk Common shares 500,000

Retained earnings 100,000

600,000

Acquisition differential – Dec. 31, Year 1 160,000

Allocated:

Inventory 70,000

Balance – patents 90,000

Non-controlling interest (15% x 760,000) 114,000 (a)

Balance Balance

Dec. 31 Amortization Dec. 31

Year 1 Year 2 Year 3 Year 3

Inventory 70,000 70,000

Patents 90,000 9,000 9,000 72,000

160,000 79,000 9,000 72,000

(a)

Non-controlling interest in profit

Year 2 15%  (30,000 – 79,000) - 7,350

Year 3 15%  (52,000 – 9,000) 6,450

(b)

Year 2 Year 3

Profit (loss) Pen 28,000 (45,000)

Dividends from Silk

Year 2 0

Year 3 (85%  15,000) (12,750)

28,000 (57,750)

Share of Silk’s profit

85%  (30,000 – 79,000) (41,650)

85%  (52,000 – 9,000) _ 36,550_

Consolidated profit (loss) attributable to Pen’s shareholders (13,650) (21,200)

(c)

Retained earnings Pen – Dec. 31, Year 3 (cost method) 91,000

Retained earnings Silk – Dec. 31, Year 3

(100,000 + 30,000 + 52,000 – 15,000) 167,000

Acquisition retained earnings 100,000

Increase since acquisition 67,000

Less: acq. diff. amort. to date (79,000 + 9,000) 88,000

Adjusted increase since acquisition - 21,000 (a)

85% - 17,850

Consolidated retained earnings – Dec. 31, Year 3 73,150

(d)

Method 1:

Silk – Common shares 500,000

Retained earnings Dec. 31, Year 3 167,000

667,000

Unamortized acquisition differential 72,000

739,000

15%

Non-controlling interest – Dec. 31, Year 3 110,850

Method 2:

Non-controlling interest – date of acquisition (a) 114,000

Retained earnings Silk – Dec. 31, Year 3

(100,000 + 30,000 + 52,000 – 15,000) 167,000

Acquisition retained earnings 100,000

Increase since acquisition 67,000

Less: acq. diff. amort. to date (79,000 + 9,000) 88,000

- 21,000

NCI’s share 15% - 3,150

Non-controlling interest – Dec. 31, Year 3 110,850

(e)

Cost of investment 646,000

Retained earnings Silk – Dec. 31, Year 3

(100,000 + 30,000 + 52,000 – 15,000) 167,000

Acquisition retained earnings 100,000

Increase since acquisition 67,000

Less: acq. diff. amort. to date (79,000 + 9,000) 88,000

- 21,000

85% - 17,850

Invest. account – equity method as at Dec. 31, Year 3 628,150

(f)

See amortization schedule above.

Alternative calculation:

Invest. account – equity Dec. 31, Year 3 628,150

Implied value of 100% (628,150 / 85%) 739,000

Silk – Common shares 500,000

Retained earnings 167,000

667,000

Balance unamortized acq. diff. – Patents 72,000

Problem 6-7

Calculation, allocation, and amortization of acquisition differential

Cost of 80% investment, Jan. 1, Year 3 1,600,000

Implied value of 100% investment 2,000,000

Carrying amounts of Least's net assets:

Assets 3,000,000

Liabilities 1,500,000

Total shareholders' equity 1,500,000

Acquisition differential 500,000

Allocation: FV - CA

Accounts receivable - 20,000

Inventories - 50,000

Plant and equipment (net) 35,000

Long-term liabilities 100,000 65,000

Balance – goodwill 435,000

Balance Amortization Balance

Jan. 1 Dec. 31

Year 3 Years 3 to 8 Year 9 Year 9

Accounts receivable - 20,000 - 20,000

Inventories - 50,000 - 50,000

Plant and equipment (net) 35,000 26,250 4,375 4,375 (a)

Long-term liabilities 100,000 100,000

Goodwill 435,000 52,200 8,700 374,100 (b)

500,000 108,450 (c) 13,075 (d) 378,475