On January 1, 2020, Alison, Inc., paid $60,000 for a 40 percent interest in Holister Corporation’s common stock. This investee had assets with a book value of $200,000 and liabilities of $75,000. A patent held by Holister having a $5,000 book value was actually worth $20,000. This patent had a six-year remaining life. Any further excess cost associated with this acquisition was attributed to goodwill. During 2020, Holister earned income of $30,000 and declared and paid dividends of $10,000. In 2021, it had income of $50,000 and dividends of $15,000. During 2021, the fair value of Allison’s investment in Holister had risen from $68,000 to $75,000.
a. Assuming Alison uses the equity method, what balance should appear in the Investment in Holister account as of December 31, 2021?
b. Assuming Alison uses fair-value accounting, what income from the investment in Holister should be reported for 2021?
BuyCo, Inc., holds 25 percent of the outstanding shares of Marqueen Company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $10,000 per year. For 2020, Marqueen reported earnings of $100,000 and declares cash dividends of $30,000. During that year, Marqueen acquired inventory for $50,000, which it then sold to BuyCo for $80,000. At the end of 2020, BuyCo continued to hold merchandise with a transfer price of $32,000.
a. What Equity in Investee Income should BuyCo report for 2020?
b. How will the intra-entity transfer affect BuyCo’s reporting in 2021?
c. If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?
On May 29, 2018, Microchip Technology Incorporated acquired all of the outstanding stock of Microsemi Corporation in exchange for $8.19 billion in cash to the stockholders of Microsemi. Referring to Microchip’s March 31, 2019 financial statements and any media coverage, answer the following questions regarding the Microsemi acquisition.
1. Why did Microchip acquire Microsemi?
2. What accounting method was used, and for what amount, to record the acquisition?
3. What amount did Microchip include in precombination service compensation (for acquisition-related equity awards) in the total consideration transferred? What support is provided for this treatment in the Accounting Standards Codification® (see ASC 805-30-30, paragraphs 9-13)?
4. What allocations did Microchip make to the assets acquired and liabilities assumed in the acquisition? Provide a calculation showing how Microchip determined the amount allocated to goodwill.
5. How will Microchip account for the core technology and the in-process research and development acquired in the Microsemi combination?