Reference no: EM132928957

Question - The 100,000 ordinary shares of Willow Inc. are held 75% by Leather Company, 20% by Mohammad Rizwan, and 5% by Lutho Sipamla. Rohit Sharma owns 100% of Leather Company.

Rohit Sharma and Mohammad Rizwan do not get along. Although Leather Company has the controlling interest in Willow Inc., one would never know it during shareholders' meetings. Mohammad always argues with Rohit and continually threaten legal action if his rights as a minority shareholder are not protected.

After the latest shareholders' meeting, Rohit had enough of the fighting. He offered that Leather Company would buy Mohammad's 20% shares in Willow Inc. for $54 per share. He believed this was a very fair price, as Lutho bought his 5% shares recently for $50 per share. To Rohit's delight, Mohammad accepted the offer and the transaction was finalized on December 31, 2020. At December 31, 2020, the unamortized acquisition differential relating to the purchases by Leather Company was $250,000, which related solely to goodwill. On the closing date, the shares of Willow Inc. had a carrying amount of $35 per share and all the identifiable net assets had a fair value about equal to their carrying amount, accept for unrecognized patents, which had a fair value of $650,000 and an estimated useful life of four years.

Rohit wants to recognize the entire acquisition differential related to the new purchase from Mohammad as goodwill in order to minimize the impact on earnings for 2020 and 2021. Leather Company's accountant believes that some of the acquisition differential should be charged to income in 2020 as a loss, because of the excessive price paid for the shares.

Required - How should Leather account for the purchase of the shares? Provide arguments to support your position and indicate the impact of your decision on consolidated profit attributable to the shareholders of Leather Company for 2020 and 2021.