Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.
Demers earns income and pays dividends as follows: $\begin{array}{lrrr}&2010&2011&2012\
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$ Assume the partial equity method is applied.
-Compute the noncontrolling interest in Demers at December 31, 2010.

Question

Quizplus · Accepted Answer

The noncontrolling interest at December 31, 2010, is calculated as 20% of Demers' equity at that date. Demers' equity includes the initial common stock and retained earnings, adjusted for undervaluation of assets, net income, and dividends. The calculation is: $300,000 (common stock) + $210,000 (retained earnings) + $30,000 (equipment undervaluation) + $40,000 (building undervaluation) + $100,000 (net income) - $40,000 (dividends) = $640,000. 20% of $640,000 is $128,000. Adding the share of the undervaluation adjustments ($30,000 + $40,000) * 20% = $14,000, the total is $128,000 + $14,000 = $142,000. However, the correct choice is $135,600, which suggests an adjustment or error in the calculation or provided options.

Pell Company Acquires 80% of Demers Company for $500,000 on January