McGuire Company acquired 90 percent of Hogan Company on January 1, 2010, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.
In consolidation at December 31, 2010, what net adjustment is necessary for Hogan's Patent account?

Question

McGuire Company acquired 90 percent of Hogan Company on January 1, 2010, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.
In consolidation at December 31, 2010, what net adjustment is necessary for Hogan's Patent account?

Quizplus · Accepted Answer

The excess consideration transferred over fair value is $234,000 - ($160,000 + $80,000) = $(6,000).
This excess consideration is attributable to an unamortized patent with a useful life of 5 years.
Therefore, the annual amortization expense for the patent is $6,000/5 = $1,200.
As of December 31, 2010, McGuire Company has owned Hogan Company for the entire year, so the amortization expense for the patent is $1,200.
However, the patent account balance still shows its total cost of $6,000.
Thus, the necessary net adjustment for Hogan's Patent account is $6,000 (total cost) - $1,200 (amortization expense for 2010) = $4,800.

Therefore, the correct answer is B, $8,800.

McGuire Company Acquired 90 Percent of Hogan Company on January