P Corp.owns 800 of Q Corp.'s 1,000 outstanding voting common shares which it accounts for using the equity method.On December 31,2009,the shareholder's equity section of Q Corp.was comprised of $15,000 in common stock and retained earnings in the amount of $450,000.
Q Corp.reported net Income and paid dividends of $120,000 and $20,000 respectively for the year ended December 31,2010.
On January 1,2011,P Corp.sold 200 shares of its investment in Q Corp.for $125,000.On January 1,2010,the investment account had a balance of $420,000.The acquisition differential was to be allocated as follows:
60% to patents (6 year remaining life).
30% to equipment (9 year remaining life).
-What was the amount of acquisition differential amortization for 2010?

Question

Quizplus · Accepted Answer

The acquisition differential is allocated 60% to patents and 30% to equipment. The total differential is $30,000 (since P Corp. owns 80% of Q Corp., the differential is 80% of the difference between the book value and the purchase price). The amortization for 2010 is calculated as follows: $18,000 (60% of $30,000) / 6 years for patents = $3,000 and $9,000 (30% of $30,000) / 9 years for equipment = $1,000. Total amortization for 2010 is $3,000 + $1,000 = $4,000. However, since the question asks for the total amortization of the acquisition differential, the correct answer is $8,000, which includes the amortization of the entire differential over the respective useful lives.

P CorpOwns 800 of Q Corp