The following information applies to Questions 32 - 34
On January 1, 20X2, Ephraim Corporation acquired 80 percent of Lilac Corporation for $200,000 cash. Lilac reported net income of $25,000 each year and dividends of $5,000 each year for 20X2, 20X3, and 20X4. On January 1, 20X2, Lilac reported common stock outstanding of $160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was $50,000. It held land with a book value of $90,000 and a market value of $100,000, and equipment with a book value of $40,000 and a market value of $48,000 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 eight years. All depreciable assets held by Lilac at the date of acquisition had a remaining economic life of eight years. Ephraim uses the equity method in accounting for its investment in Lilac.
-Based on the preceding information,the increase in the fair value of patents held by Lilac is
A) $10,000
B) $18,000
C) $32,000
D) $50,000

Question

Quizplus · Accepted Answer

The total consideration paid by Ephraim Corporation for 80% of Lilac Corporation was $200,000. At the date of acquisition, Lilac had common stock outstanding of $160,000 and retained earnings of $40,000, which totaled $200,000. Therefore, there was no goodwill recognized at acquisition. The fair value of the noncontrolling interest was $50,000, so the implied value of the controlling interest was $200,000 - $50,000 = $150,000.
The net identifiable assets (book value) of Lilac Corporation at the date of acquisition were:
Land: $90,000
Equipment: $40,000
Total identifiable assets: $130,000
The difference between the implied value of the controlling interest and the net identifiable assets acquired was $150,000 - $130,000 = $20,000. This difference is attributable to the increase in value of patents which had a remaining useful life of eight years. Therefore, the increase in the fair value of patents held by Lilac is $20,000, not $10,000, $18,000, or $50,000.

The Following Information Applies to Questions 32 - 34