Financial Accounting and Reporting-CPA Practice Exam

Which method excludes goodwill when calculating non-controlling interest?

1. Full Goodwill Method

2. Equity Method

3. Partial Goodwill Method

4. Consolidated Method

The correct answer is: Partial Goodwill Method

The Partial Goodwill Method, which is the correct choice, is used to calculate non-controlling interest by excluding goodwill. This method is employed in business consolidations when the acquirer pays less than the fair value of the identifiable net assets of the acquired entity, thereby reflecting that the non-controlling interest only represents a proportionate share of the identifiable net assets, not the goodwill. In this scenario, the non-controlling interest is recorded based solely on the fair value of the identifiable assets and liabilities of the subsidiary at acquisition, without attributing any goodwill associated with the controlling interest. This approach provides a clearer picture of what the non-controlling interest actually represents—their stake in the specific assets rather than any additional value assigned through goodwill. In contrast, the Full Goodwill Method would include goodwill in the calculation of non-controlling interest, while the Equity Method relates more directly to investment accounting rather than the specific method of calculating non-controlling interest in a consolidated financial statement. The Consolidated Method refers to the overall process of merging financial statements of a parent company with its subsidiaries but does not specifically pertain to how non-controlling interest is calculated regarding goodwill.