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).
-How much of the acquisition differential was allocated to patents?

Question

Quizplus · Accepted Answer

The acquisition differential is the difference between the purchase price and the book value of the acquired shares. Since P Corp. owns 80% of Q Corp., the acquisition differential is 80% of the difference between the investment account balance and the book value of Q Corp.'s equity. The allocation to patents is 60% of this differential.

P CorpOwns 800 of Q Corp