P Corp. owns 800 voting common shares out of Q Corp.'s 1,000 outstanding voting common shares, which it accounts for using the equity method. On December 31, 2018, the shareholder's equity section of Q Corp. was comprised of $15,000 in common shares and retained earnings with 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, 2019.
There have been no goodwill impairment losses since acquisition.
On January 1, 2020, P Corp. sold 200 shares of its investment in Q Corp. for $125,000. On January 1, 2019, 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).
How much of the acquisition differential was allocated to patents on January 1, 2019?
A) Nil
B) $6,000
C) $18,000
D) $36,000

Question

Quizplus · Accepted Answer

The acquisition differential is the difference between the cost of the investment and the book value of the underlying equity in the investee. P Corp. owns 80% of Q Corp., and the book value of Q Corp.'s equity on December 31, 2018, was $465,000 ($15,000 in common shares + $450,000 in retained earnings). P Corp.'s share of Q Corp.'s book value is 80% of $465,000, which equals $372,000. The investment account had a balance of $420,000 on January 1, 2019, indicating an acquisition differential of $48,000 ($420,000 - $372,000). 60% of this differential, allocated to patents, is $28,800 (60% of $48,000).

P Corp Owns 800 Voting Common Shares Out of Q Corp