On January 1, 2019, Uncle Company purchased 80 percent of Nephew Company's capital stock for $576,000 in cash and other assets. Nephew had a book value of $678,000, and the 20 percent noncontrolling interest fair value was $144,000 on that date. On January 1, 2021, Nephew had acquired 30 percent of Uncle for $288,250. Uncle's appropriately adjusted book value as of that date was $927,500. Separate operating income figures (not including investment income) for these two companies follow. In addition, Uncle declares and pays $20,000 in dividends to shareholders each year and Nephew distributes $5,000 annually. Any excess fair-value allocations are amortized over a 10-year period. Uncle Company Year 2019 $ 107,000 2020 2021 156,000 181,000 Nephew Company $ 33,000 57,800 60,400 a. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary's income recognized by Uncle in 2021? b. What is the net income attributable to the noncontrolling interest for 2021?
On January 1, 2019, Uncle Company purchased 80 percent of Nephew Company's capital stock for $576,000 in cash and other assets. Nephew had a book value of $678,000, and the 20 percent noncontrolling interest fair value was $144,000 on that date. On January 1, 2021, Nephew had acquired 30 percent of Uncle for $288,250. Uncle's appropriately adjusted book value as of that date was $927,500. Separate operating income figures (not including investment income) for these two companies follow. In addition, Uncle declares and pays $20,000 in dividends to shareholders each year and Nephew distributes $5,000 annually. Any excess fair-value allocations are amortized over a 10-year period. Uncle Company Year 2019 $ 107,000 2020 2021 156,000 181,000 Nephew Company $ 33,000 57,800 60,400 a. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary's income recognized by Uncle in 2021? b. What is the net income attributable to the noncontrolling interest for 2021?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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2.
![### Intercompany Investments and Financial Reporting
**Scenario Overview:**
On January 1, 2019, Uncle Company purchased an 80 percent stake in Nephew Company for $576,000 in cash and other assets. Nephew's book value at the time was $678,000, and the fair value of the remaining 20 percent noncontrolling interest was $144,000. On January 1, 2021, Nephew acquired a 30 percent stake in Uncle for $288,250, where Uncle's appropriately adjusted book value was $927,500.
**Separate Operating Income (Excluding Investment Income):**
The operating incomes for Uncle and Nephew over the three-year period are as follows. Uncle distributes $20,000 in dividends annually, and Nephew distributes $5,000 in dividends annually. Any excess fair-value allocations are amortized over a 10-year period.
| Year | Uncle Company Operating Income | Nephew Company Operating Income |
|---------|--------------------------------|---------------------------------|
| 2019 | $107,000 | $33,000 |
| 2020 | $156,000 | $57,800 |
| 2021 | $181,000 | $60,400 |
**Key Questions:**
a. **Uncle applies the equity method to account for its investment in Nephew.**
- **Question:** What is the subsidiary's income recognized by Uncle in 2021?
b. **Allocation of Noncontrolling Interest:**
- **Question:** What is the net income attributable to the noncontrolling interest for 2021?
**Graphical Explanation:**
*(Assuming there were graphs or diagrams related to the financial figures provided, they would be described here in detail for clarity.)*
### Detailed Breakdown
**Investment and Profit Allocation:**
- **Equity Method**: Using the equity method, Uncle records its share of Nephew’s net income as investment income. Since Uncle owns 80% of Nephew, Uncle will recognize 80% of Nephew's 2021 net income.
\[
\text{Uncle's Share of Nephew's Income} = 80\% \times \$60,400 = \$48,320
\]
- **Noncontrolling Interest**: The noncontrolling interest represents the 20% of Nephew's net income attributable to other stakeholders.
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Transcribed Image Text:### Intercompany Investments and Financial Reporting
**Scenario Overview:**
On January 1, 2019, Uncle Company purchased an 80 percent stake in Nephew Company for $576,000 in cash and other assets. Nephew's book value at the time was $678,000, and the fair value of the remaining 20 percent noncontrolling interest was $144,000. On January 1, 2021, Nephew acquired a 30 percent stake in Uncle for $288,250, where Uncle's appropriately adjusted book value was $927,500.
**Separate Operating Income (Excluding Investment Income):**
The operating incomes for Uncle and Nephew over the three-year period are as follows. Uncle distributes $20,000 in dividends annually, and Nephew distributes $5,000 in dividends annually. Any excess fair-value allocations are amortized over a 10-year period.
| Year | Uncle Company Operating Income | Nephew Company Operating Income |
|---------|--------------------------------|---------------------------------|
| 2019 | $107,000 | $33,000 |
| 2020 | $156,000 | $57,800 |
| 2021 | $181,000 | $60,400 |
**Key Questions:**
a. **Uncle applies the equity method to account for its investment in Nephew.**
- **Question:** What is the subsidiary's income recognized by Uncle in 2021?
b. **Allocation of Noncontrolling Interest:**
- **Question:** What is the net income attributable to the noncontrolling interest for 2021?
**Graphical Explanation:**
*(Assuming there were graphs or diagrams related to the financial figures provided, they would be described here in detail for clarity.)*
### Detailed Breakdown
**Investment and Profit Allocation:**
- **Equity Method**: Using the equity method, Uncle records its share of Nephew’s net income as investment income. Since Uncle owns 80% of Nephew, Uncle will recognize 80% of Nephew's 2021 net income.
\[
\text{Uncle's Share of Nephew's Income} = 80\% \times \$60,400 = \$48,320
\]
- **Noncontrolling Interest**: The noncontrolling interest represents the 20% of Nephew's net income attributable to other stakeholders.
\
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