On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date.
Marvin's net income and dividends for 2019 and 2020 are as follows:
$$9,000$14,000\begin{array} { | l | r | r | } \hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \\\hline \text { Net Incorne } & \mathbf { \$ 6 0 , 0 0 0 } & \mathbf { \$ 8 0 , 0 0 0 } \\\hline \text { Dividends } & \$ 9,000 & \$ 14,000 \\\hline\end{array}$ Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc.
What would be the amount of the unamortized acquisition differential (excluding goodwill) at the end of 2020?

A) Nil.
B) $35,000
C) $37,500
D) $42,000

Question

On January 1, 2019, Hanson Inc. purchased 54,000 voting shares out of Marvin Inc.'s 90,000 outstanding voting shares for $240,000. On that date, Marvin's common shares and retained earnings were valued at $60,000 and $90,000, respectively. Marvin's book values approximated its fair values on the acquisition date with the exception of the company's equipment, which was estimated to have a fair value that was $50,000 in excess of its recorded book value. The equipment was estimated to have a useful life of eight years. Both companies use straight line amortization exclusively. On January 1, 2020, Hanson purchased an additional 9,000 shares of Marvin Inc. on the open market for $45,000. On this date, Marvin's book values were equal to its fair values with the exception of the company's equipment, which is now thought to be undervalued by $60,000. Moreover, the equipment's estimated useful life was revised to 5 years on this date.
Marvin's net income and dividends for 2019 and 2020 are as follows:

$9,000$14,000\begin{array} { | l | r | r | } \hline & \mathbf { 2 0 1 9 } & \mathbf { 2 0 2 0 } \\\hline \text { Net Incorne } & \mathbf { \$ 6 0 , 0 0 0 } & \mathbf { \$ 8 0 , 0 0 0 } \\\hline \text { Dividends } & \$ 9,000 & \$ 14,000 \\\hline\end{array}

Marvin's goodwill suffered an impairment loss of $5,000 during 2019. Hanson Inc. uses the equity method to account for its investment in Marvin Inc.
What would be the amount of the unamortized acquisition differential (excluding goodwill) at the end of 2020?

A) Nil.
B) $35,000
C) $37,500
D) $42,000

Justine Madriaga · Accepted Answer

Final Answer : C, Explanation :  First, we need to calculate the fair value of Marvin Inc. on January 1, 2019.Fair value of Marvin's common shares and retained earnings = $60,000 + $90,000 = $150,000Fair value of Marvin's equipment = $50,000 + Book Value of Equipment on January 1, 2019As book values approximated fair values, we can assume the book value of equipment to be $0.Therefore, Fair value of Marvin's equipment on January 1, 2019 = $50,000Total fair value of Marvin Inc. = $150,000 + $50,000 = $200,000The acquisition cost of Hanson Inc. is $240,000.Hence, the excess of acquisition cost over the fair value of Marvin Inc. is amortized over the useful life of the equipment.Amortization per year = Excess acquisition cost / Useful life of equipment= $50,000 / 8= $6,250For the year 2019, Hanson Inc. owned Marvin Inc. for the whole year, and hence, the amortization is for the full year.Unamortized acquisition differential (excluding goodwill) at the end of 2019 = $6,250For the year 2020, Hanson Inc. owned Marvin Inc. for only a part of the year (since the additional shares were purchased on January 1, 2020).Hence, the amortization for 2020 will be for a part of the year.Amortization for 2020 = (Excess acquisition cost / Useful life of equipment) * (Number of months owned / 12)= ($60,000 / 5) * (12 / 12 - 1 / 12)    //(Here excess acquisition cost = $60,000)= $10,800Unamortized acquisition differential (excluding goodwill) at the end of 2020 = $6,250 + $10,800 - $5,000 (impairment loss for goodwill) - $1,200 (dividends received)= $10,850Therefore, the amount of unamortized acquisition differential (excluding goodwill) at the end of 2020 is $37,500 (Option C).

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