Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.
If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?
A) $1,080,000.
B) $1,104,000.
C) $1,100,000.
D) $1,468,000.
E) $1,475,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the excess of the acquisition cost over the fair value of Kenneth's net assets:
Acquisition cost - Fair value of net assets = Excess
Excess = Purchase price - (Fair value of equipment)
Excess = Acquisition cost - (Book value + adjustments to fair value)
Excess = $0 (since the book value of equipment was the same as the fair value)
Next, we need to calculate the investment in Kenneth's equity:
Investment in Kenneth's equity = Purchase price - Fair value of net assets acquired
Investment in Kenneth's equity = Acquisition cost - (Book value + adjustments to fair value)
Investment in Kenneth's equity = $25,000 (since the book value of equipment was adjusted to fair value)
Now, we can calculate the consolidated balance for the Equipment account:
Consolidated value of equipment = Goehler's equipment + Investment in Kenneth's equity + Kenneth's equipment
Consolidated value of equipment = $1,350,000 + $25,000 + $125,000
Consolidated value of equipment = $1,500,000
However, we need to eliminate the effect of the excess acquisition cost on Goehler's equipment. Since the excess was $0, we don't need to make any adjustments. Therefore, the consolidated balance for the Equipment account as of December 31, 2013 is $1,104,000 (Calculation: $800,000 + $25,000 + $105,000 + $125,000 + $49,000).