Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted. Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2011, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the equity in Vega's income to be included in Green's consolidated income statement for 2015.
A) $500,000.
B) $300,000.
C) $190,375.
D) $200,000.
E) $290,375.

Question

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.  Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2011, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the equity in Vega's income to be included in Green's consolidated income statement for 2015.
A) $500,000. 
B) $300,000. 
C) $190,375. 
D) $200,000. 
E) $290,375.

Quizplus · Accepted Answer

To compute the equity in Vega's income to be included in Green's consolidated income statement for 2015, we first need to determine Vega's net income for 2015. We are given Vega's retained earnings balance on January 1, 2015, but we also need to determine any adjustments that need to be made to Vega's net income for the current year.

From the information given, we know that Vega's buildings were overvalued by $30,000 and that they have a 20-year life. This means that the annual depreciation expense for the buildings should be $1,500 ($30,000 / 20 years). Similarly, Vega's equipment was undervalued by $80,000 and has a 10-year life, which means that the annual depreciation expense for the equipment should be $8,000 ($80,000 / 10 years).

We also know that $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. This means that the annual amortization expense for the trademark should be $3,125 ($50,000 / 16 years).

Therefore, we can adjust Vega's net income for the year as follows:

Vega's net income for the year = $75,000 
Adjustments: 
Depreciation expense for buildings = $1,500 
Depreciation expense for equipment = $8,000 
Amortization expense for trademark = $3,125 
Total adjustments = $12,625 
Adjusted net income for Vega = $87,625

Now we need to determine the amount of equity in Vega's income that should be included in Green's consolidated income statement for 2015. To do this, we first need to determine the noncontrolling interest in Vega's net income, which is calculated as follows:

Noncontrolling interest in Vega's net income = (Vega's adjusted net income - Vega's preferred dividends) x noncontrolling interest percentage 
Note: No preferred dividends are mentioned, so we can assume that there were none.

Noncontrolling interest percentage = 10,500 / (10,500 + 22,500) = 0.318

Noncontrolling interest in Vega's net income = ($87,625 - 0) x 0.318 = $27,858.75

Finally, we can calculate the equity in Vega's income as follows:

Equity in Vega's income = Vega's adjusted net income - Noncontrolling interest in Vega's net income 
Equity in Vega's income = $87,625 - $27,858.75 = $59,766.25

Therefore, the equity in Vega's income to be included in Green's consolidated income statement for 2015 is $59,766.25.

Following Are Selected Accounts for Green Corporation and Vega Company