At the start of 2016, Suburban decided to provide its publications with a new, fresh look and include more high-quality colored images. To meet this need, Suburban purchased HiQ Printers, which had high speed production printing presses in all of Suburban’s distribution areas. Suburban purchased 60% of the company’s shares in exchange for its own shares. At the time of the purchase, there were 8 million shares of HiQ Printers outstanding trading at $14 per share. The fair value of HiQ Printers’ net identifiable assets at that time was $99 million. Exhibit 4 shows the shareholders’ equity of both companies prior to the business combination.
Q. Immediately following its business combination with HiQ Printers, the total shareholders’ equity (in thousands) on Suburban’s consolidated financial statements is closest to:
- $532,200.
- $577,000.
- $571,800.
Solution
B is correct. The shareholders’ equity section of the post-acquisition consolidated balance sheet will consist of the capital stock and retained earnings account of the parent and the non-controlling interest of the minority shareholders. Under US GAAP, the value of the non-controlling interest is equal to the non-controlling interest’s proportionate share of the subsidiary’s fair value.
A: Amount paid for 60% interest = 60% × $14/share× 8,000,000 shares = $67,200 thousand
Fair value of subsidiary = 8 million shares ×$14/share = $112,000 thousand
B: Non-controlling interest = $112,000 × (1 – 0.60) = $44,800 thousand
Shareholders’ Equity** ($ thousands) **Calculation Non-controlling interest 44,800 See B above Capital stock 347,200 280,000 + 67,200: Original + Issued in acquisition (see A.above) Retained earnings 185,000 Suburban’s retained earnings Total equity 577,000
Why did not we include the retained earnings of the subsidiary worth $26,000?