Can someone please explain the allocation to assets of the excess of purchase price over book. Lots of text, but fairly simple question. on Jan. 1, 2011 Parker buys 30% stake of Price for $500,000 cash. Parker has influence. As of Jan. 1, we have the following info for Prince:
Book Value: Current Assets = 100,000 Plant & Equipment = 1.9 mil Assets = 100K + 1.9 mil = 200 mil Liabilities = 800K Net Assets = 1.2 mil
Fair Value: Current Assets = 100,000 Plant & Equipment = 2.2 mil Assets = 100K + 2.2 mil = 2.3 mil Liabilities = 800K Net Assets = 1.5 mil
Difference (btwn fair and book) CA = 0 Plant & Equipment = 300K Assets = 0 Liabilities = 0 Net Assets = 300K The Plant & Equipment are depreciated straigh-line, with 10 years remaining lfe. Pricnce reports 2011 Net Income of 100K and pays Dividends of 50K
Q1) Calculate the goodwill included in the purchase price. Answer = 50K Purchase Price = 500K Acquired equity in BV of Prince’s net assets = 360K Excess purchase cost over book = 140K Attributabel to Plant & Equipment = (90K) Goodwill = 50K I understand that bc there’s influence, we’re using the Equity Method. I also get that BV was only 1.2 mil, and so a 30% stake should (theoretically) only cost 0.3(1.2 mil) = $360K, but we paid $500K, meaning we paid an excess of $140K. I get everything up to this point. What I’m having trouble grasping is the (90K). I get the calculation 0.3(300K), but what I have trouble with is the concept of the allocation. The book says “The excess purchase price allocated to the assets and liabilities is accounted for in a manner that is consistent with the accounting treatment for the specific asset or liability to which it is assigned…These allocated amounts are not reflected on the financial statements of the associate, and the associate’s IS will not reflect the necessary periodic adjustments. Therefore, the investor [Parker] must directly record these adjustment effects by reducing the carry amount of the investment on its BS and by reducing the associate’s profit recognized on its IS.” Can someone clarify this? My gut interpretation: Current assets are going to be used up this period so we don’t allocate anything to them. Plant and Equipment give you use over multiple periods and so we must allocate that difference (FV-BV = 300K) accordingly…but what actually happens to that 90K. Where does it go? And on whose statements? Any clarification would be helpful.