Question 15.4: On 1 January 2009 Parker Company acquired 30 percent of Prin...
On 1 January 2009 Parker Company acquired 30 percent of Prince Inc. common shares for the cash price of €500,000 (both companies are fictitious). It is determined that Parker has the ability to exert significant influence on Prince’s financial and operating decisions. The following information concerning Prince’s assets and liabilities on 1 January 2009 is provided:
The plant and equipment are depreciated on a straight-line basis and have 10 years of remaining life. Prince reports net income for 2009 of €100,000 and pays dividends of €50,000. Calculate the following:
1. Goodwill.
2. Balance in the investment in associate (Prince) at the end of 2009.
| Prince, Inc | Book Value | Fair Value | Difference |
| Current assets | € 100,000 | € 100,000 | 0 |
| Plant and equipment | \underline{1,900,000} | \underline{2,200,000} | \underline{300,000} |
| € 2,000,000 | € 2,300,000 | € 300,000 | |
| Liabilities | \underline{800,000} | \underline{800,000} | \underline{0} |
| Net assets | € 1,200,000 | € 1,500,000 | € 300,000 |
1. Goodwill
(table 1)
2. Investment in Associate
(table 2)
An alternate way to look at the balance in the investment account reflects the basic valuation principle of the equity method. At any point in time, the investment account balance equals the investor’s (Parker) monetary equity in the recorded net assets of the investee (Prince) plus the unamortized balance of the original excess purchase price.
Applying this principle to this example:
(table 3)
Note that the unamortized excess purchase price is a cost incurred by Parker, not Prince. Therefore, the total amount (not 30 percent) is included in the investment account balance.
| table 1 | |
| Purchase price | € 500,000 |
| Acquired equity in book value of Prince’s net assets (30% × €1,200,000) | \underline{360,000} |
| 360,000 Excess purchase price | € 140,000 |
| Attributable to plant and equipment (30% × €300,000) | 90,000 |
| Goodwill (residual) | \underline{50,000} |
| € 140,000 | |
| table 2 | |
| Purchase price | € 500,000 |
| Parker’s share of Prince’s net income 30,000 (30% × €100,000) | 30,000 |
| Dividends received (30% of €50,000) | (15,000) |
| Amortization on excess purchase price attributable to plant and equipment (€90,000 ÷ 10 years) | \underline{(9,000)} |
| 31 December 09 balance in investment in Prince | \underline{\underline{€506,000} } |
| table 3 | |
| Parker’s Monetary Equity in Prince’s Recorded Net Assets [30% × (€1,200,000 + 100,000 – 50,000)] | €375,000 |
| Unamortized excess purchase price (€140,000 – 9,000) | \underline{131,000} |
| Investment in Prince | \underline{\underline{€506,000} } |