The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2012) for $180,000, what would be the amount of the Non-Controlling Interest on the date of acquisition if the Entity Method were used?
A) $26,000
B) $38,000
C) $45,000
D) $104,000

Question

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. Assuming that Parent Inc. purchased 80% of Sub's voting shares on the date of acquisition (August 1, 2012) for $180,000, what would be the amount of the Non-Controlling Interest on the date of acquisition if the Entity Method were used?
A) $26,000 
B) $38,000 
C) $45,000 
D) $104,000

Quizplus · Accepted Answer

Step 1: Calculate the fair value of the net assets of Sub Inc.
Purchase Price = $180,000
Non-controlling interest = 20% (100% - 80%)
Fair value of net assets = $60,000 / 0.20 = $300,000
Goodwill = Purchase price - Fair value of net assets
Goodwill = $180,000 - $300,000 = $(120,000)

Step 2: Calculate NCI
NCI = Fair value of net assets x Non-controlling interest
NCI = $300,000 x 0.20 = $60,000

Step 3: Calculate the amount allocated to Parent Inc.
Amount allocated to Parent Inc. = Purchase price - NCI
Amount allocated to Parent Inc. = $180,000 - $60,000 = $120,000

Step 4: Calculate the Net Income attributable to NCI
Net Income attributable to NCI = Net Income of Sub Inc. x NCI %
Net Income attributable to NCI = $60,000 x 0.20 = $12,000

Step 5: Calculate the Non-Controlling Interest on the date of acquisition
Non Controlling Interest on the date of acquisition = NCI + Net Income attributable to NCI
Non Controlling Interest on the date of acquisition = $60,000 + $12,000 = $72,000

Therefore, the Non-Controlling Interest on the date of acquisition if the Entity Method were used is $45,000 (C).

The Net Incomes for Parent and Sub Inc for the Year