On December 31,20X8,Polaris Corporation acquired 100 percent ownership of Star Corporation.On that date,Star reported assets and liabilities with book values of $300,000 and $100,000,respectively,common stock outstanding of $50,000,and retained earnings of $150,000.The book values and fair values of Star's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000.
-Based on the preceding information,what amount of differential will appear in the consolidating entries required to prepare a consolidated balance sheet immediately after the business combination,if the acquisition price was $240,000?
A)$0
B)$40,000
C)$25,000
D)$5,000

Question

Quizplus · Accepted Answer

The acquisition price of $240,000 exceeds the book value of Star Corporation's common stock ($50,000+$100,000=$150,000) by $90,000. The increase in land value of $10,000 is already reflected in the book values, so it does not affect the differential. The decrease in inventory of $5,000 decreases the book value of assets to $295,000 ($300,000-$5,000). Therefore, the differential is $240,000-$295,000=$-55,000. This is a negative differential or a bargain purchase. The consolidating entries will include recording the negative differential under the non-controlling interest, reducing the assets and liabilities of Star Corporation to their fair values, and recognizing any goodwill or gain on bargain purchase that may arise. The amount of the differential is $40,000 ($-55,000*(-0.8)), where -0.8 is the non-controlling interest percentage of 20%. Therefore, the best answer is B, $40,000.

On December 31,20X8,Polaris Corporation Acquired 100 Percent Ownership of Star