A subsidiary, Boston Corp., is wholely acquired by Massachusetts Co. on January 1, 2015 for $10 million. The subsidiaryâs book value at the date of acquisition was $2 million. Following is the information for the subsidiaryâs identifiable net assets at the date of acquisition: Fair Value Excess Inventories is overvalued (i.e., book value > fair value): $ 200,000 FIFO Identifiable intangibles is undervalued: $ 5,000,000 Straight-line, 5 years Long-term debt is undervalued: $ 300,000 Straight-line, 2 years Inventories (based on FIFO costing assumption) are sold in 2015. The subsidiary did not declare any dividends during this period, and reported no other comprehensive income. The subsidiary reported net income as follows: Year Net Income 2015 $1,500,000 2016 2,500,000 2017 2,000,000 The parent uses the equity method to report its investment on its own books. Equity in the Subsidiary's net income for 2015, reported on the parentâs books, is:
A. $150,000
B. $2,150,000
C. $850,000
D. $1,050,000
A subsidiary, Boston Corp., is wholely acquired by Massachusetts Co. on January 1, 2015 for $10 million. The subsidiaryâs book value at the date of acquisition was $2 million. Following is the information for the subsidiaryâs identifiable net assets at the date of acquisition: Fair Value Excess Inventories is overvalued (i.e., book value > fair value): $ 200,000 FIFO Identifiable intangibles is undervalued: $ 5,000,000 Straight-line, 5 years Long-term debt is undervalued: $ 300,000 Straight-line, 2 years Inventories (based on FIFO costing assumption) are sold in 2015. The subsidiary did not declare any dividends during this period, and reported no other comprehensive income. The subsidiary reported net income as follows: Year Net Income 2015 $1,500,000 2016 2,500,000 2017 2,000,000 The parent uses the equity method to report its investment on its own books. Equity in the Subsidiary's net income for 2015, reported on the parentâs books, is:
A. $150,000
B. $2,150,000
C. $850,000
D. $1,050,000
Related questions
Determining ending balances of accounts on the consolidated balance sheet
Assume that the parent company acquires its subsidiary by exchanging 75,400 shares of its Common Stock, with a fair value on the acquisition date of $30 per share, for all of the outstanding voting shares of the investee. In its analysis of the investee company, the parent values all of the subsidiaryâs assets and liabilities at an amount equaling their book values except for a building that is undervalued by $480,000, an unrecorded License Agreement with a fair value of $230,000, and an unrecorded Customer List owned by the subsidiary with a fair value of $120,000. Any further discrepancy between the purchase price and the book value of the subsidiaryâs Stockholdersâ Equity is attributed to expected synergies to be realized by the consolidated company as a result of the acquisition.
a. Given the following acquisition-date balance sheets of the parent and subsidiary, at what amounts will each of the following be reported on the consolidated balance sheet? (see table numbered 1-7 to answer)
| Balance Sheet | Parent | Subsidiary |
|---|---|---|
| Assets | ||
| Cash | $728,400 | $181,440 |
| Accounts receivable | 307,200 | 375,840 |
| Inventory | 465,600 | 482,760 |
| Equity investment | 2,262,000 | |
| Property, plant and equipment (PPE), net | 2,000,000 | 893,160 |
| Total Assets | $5,763,200 | $1,933,200 |
| Liabilities and stockholdersâ equity | ||
| Accounts payable | $150,480 | $114,300 |
| Accrued liabilities | 176,640 | 198,900 |
| Long-term liabilities | 1,062,320 | 540,000 |
| Common stock | 176,000 | 108,000 |
| APIC | 2,992,000 | 135,000 |
| Retained earnings | 1,205,760 | 837,000 |
| Total Liabilities and stockholdersâ equity | $5,763,200 | $1,933,200 |
| 1. | Accounts Receivable $_________ | |
| 2. | Equity Investment $_________ |
| 3. | PPE, net $________ | |
| 4. | Goodwill $________ | |
| 5. | Common Stock $________ | |
| 6. | APIC $________ | |
| 7. | Retained Earnings | $________ |
b. What intangible assets will be reported on the consolidated balance sheet and at what amounts?
| License Agreement $________ | |
| Customer List $________ Goodwill $________ |
