Lea Company acquired all of Tenzing Corporation's stock on January 1,2006 for $150,000 cash.On December 31,2008,the trial balances of the two companies were as follows:
Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition.The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition.At December 31,2008,Tenzing owed Lea $4,000 for services provided.

-Based on the preceding information,what amount of total liabilities will be reported in the consolidated balance sheet for 2008?
A)$225,000
B)$221,000
C)$217,000
D)$137,000

Question

Lea Company acquired all of Tenzing Corporation's stock on January 1,2006 for $150,000 cash.On December 31,2008,the trial balances of the two companies were as follows:
Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition.The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition.At December 31,2008,Tenzing owed Lea $4,000 for services provided.
 
-Based on the preceding information,what amount of total liabilities will be reported in the consolidated balance sheet for 2008?
A)$225,000 
B)$221,000 
C)$217,000 
D)$137,000

Quizplus · Accepted Answer

To prepare a consolidated balance sheet, we need to eliminate the intercompany transactions and adjust the acquired company's book values to fair value at the time of acquisition.

Elimination of intercompany transaction: Tenzing owed Lea $4,000 for services provided, which needs to be eliminated from the consolidated balance sheet.

Adjustment of book values: The acquisition price was $150,000, and Tenzing reported retained earnings of $75,000 at the date of acquisition. Therefore, the fair value of Tenzing's net assets at the date of acquisition was $225,000 ($150,000 + $75,000). The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. Therefore, the amount assigned to buildings and equipment would be $75,000 ($225,000 - $150,000), and this amount should be depreciated over five years.

The following table summarizes the adjustments:

|                      | Tenzing Corporation |         Lea Company        | Elimination | Adjustment |
|----------------------|---------------------|-----------------------------|--------------|--------------|
| Cash                 | $25,000             | $150,000                  |              |              |
| Accounts receivable  | $20,000             |                           |              |              |
| Inventory            | $50,000             |                           |              |              |
| Buildings and equipment | $200,000            | $400,000                 |              | $75,000     |
| Accumulated depreciation       | ($40,000)            | ($100,000)               |              | ($15,000)    |
| Total assets         | $255,000            | $450,000                |              | $60,000     |
| Accounts payable     | $35,000             |                           | ($4,000)      |              |
| Other liabilities    | $46,000             |                           |              |              |
| Common stock         | $100,000            | $250,000                |              |              |
| Retained earnings    | $74,000             | $150,000                |              |              |
| Total liabilities    | $81,000             |                           | ($4,000)      |              |
| Total equity         | $174,000            | $200,000                |              |              |
| Total liabilities and equity | $255,000            | $450,000                |              |              |

Therefore, the amount of total liabilities that will be reported in the consolidated balance sheet for 2008 is $221,000, which is calculated as $81,000 (Tenzing's total liabilities adjusted for the intercompany transaction) and $140,000 (Lea's total liabilities) added together.

Hence, the correct answer is B) $221,000.

Lea Company Acquired All of Tenzing Corporation's Stock on January