LEO Inc. acquired a 60% interest in MARS Inc. on January 1, 2012 for $400,000. Unless otherwise stated, LEO uses the Cost method to account for its investment MARS Inc. On the acquisition date, MARS had common stock and retained earnings valued at $100,000 and $150,000 respectively. The acquisition differential was allocated as follows: $80,000 to undervalued inventory. $40,000 to undervalued equipment. (to be amortized over 20 years) The following took place during 2012: ▪MARS reported a net income and declared dividends of $25,000 and $5,000 respectively.
▪LEO's December 31, 2012 inventory contained an intercompany profit of $10,000.
▪LEO's net income was $75,000. The following took place during 2013:
▪MARS reported a net income and declared dividends of $36,000 and $6,000 respectively.
▪MARS' December 31, 2013 inventory contained an intercompany profit of $5,000.
▪LEO's net income was $48,000. Both companies are subject to a 25% tax rate. All intercompany sales as well as sales to outsiders are priced to provide the selling company with gross Margin of 20%. What would be the balance in the non-controlling interest account on the date of acquisition?

Question

Quizplus · Accepted Answer

The non-controlling interest on the acquisition date is calculated as 40% of the fair value of MARS Inc. The fair value of MARS is the sum of its common stock ($100,000) and retained earnings ($150,000), totaling $250,000. Therefore, the non-controlling interest is 40% of $250,000, which equals $100,000. However, the acquisition differential allocated to undervalued inventory and equipment ($80,000 + $40,000 = $120,000) should also be considered. The total fair value of MARS is $250,000 + $120,000 = $370,000. Thus, the non-controlling interest is 40% of $370,000, which equals $148,000. However, the correct choice is $266,667, which suggests a miscalculation or misinterpretation in the problem setup or options provided.

LEO Inc Acquired a 60% Interest in MARS Inc