The following information applies to Questions 29-31
On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden.
-Based on the preceding information,the increase in the fair value of patents held by Wisden is:
A) $20,000
B) $25,000
C) $15,000
D) $5,000

Question

Quizplus · Accepted Answer

The total consideration paid by Climber Corporation for the purchase of Wisden Corporation was $180,000. Of this, the fair value of the non-controlling interest (or the value of the 10% of Wisden not acquired by Climber) was $20,000. This leaves $160,000 ($180,000-$20,000) as the value allocated to the controlling interest (or 90% acquired by Climber).

At the date of acquisition, Wisden held identifiable assets with a total market value of $95,000 ($35,000+$60,000). The remaining $65,000 ($160,000-$95,000) is the value of goodwill recognized at the date of acquisition.

Therefore, the increase in the fair value of patents held by Wisden is $25,000 ($65,000 - $40,000).

The Following Information Applies to Questions 29-31