On December 31,2008,Melkor Corporation acquired 80 percent of Sydney Company's common stock for $160,000.At that date,the fair value of the noncontrolling interest was $40,000.Of the $75,000 differential,$10,000 related to the increased value of Sydney's inventory,$20,000 related to the increased value of its land,and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination.Sydney sold all inventory it held at the end of 2008 during 2009.The land to which the differential related was also sold during 2009 for a large gain.At the date of combination,Sydney reported retained earnings of $75,000 and common stock outstanding of $50,000.In 2009,Sydney reported net income of $60,000,but paid no dividends.Melkor accounts for its investment in Sydney using the equity method.
-Based on the preceding information,what is the amount of write-off of differential associated with this acquisition recorded by Melkor during 2009?

Question

Quizplus · Accepted Answer

The differential related to inventory and land can be considered as having been fully realized since both were sold during 2009. The differential related to equipment is amortized over the remaining 10 year life of the equipment. The annual amortization would be $2,500 ($25,000 divided by 10 years). 
Melkor's share of Sydney's net income for 2009 is $48,000 ($60,000 times 80%). Since Sydney did not declare dividends, there would be no reduction in Melkor's investment account. 
Therefore, the write-off of differential associated with this acquisition recorded by Melkor during 2009 would be $26,000 ($10,000 + $20,000 + $2,500).

On December 31,2008,Melkor Corporation Acquired 80 Percent of Sydney Company's