On January 1, 2011, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired.
As of December 31, 2011, before preparing the consolidated worksheet, the financial statements appeared as follows: During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.
-What is the consolidated total for equipment (net) at December 31, 2011?
A) $952,000.
B) $1,058,400.
C) $1,069,600.
D) $1,064,000.
E) $1,066,800.

Question

On January 1, 2011, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired.
As of December 31, 2011, before preparing the consolidated worksheet, the financial statements appeared as follows:  During 2011, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.
-What is the consolidated total for equipment (net) at December 31, 2011?
A) $952,000. 
B) $1,058,400. 
C) $1,069,600. 
D) $1,064,000. 
E) $1,066,800.

Quizplus · Accepted Answer

Consolidated total for equipment (net) at December 31, 2011 can be calculated as follows:

Equipment at fair value: $28,000 (allocated to equipment which was undervalued on Strong's books)
Equipment at Strong's book value: $35,000 (since it was undervalued, its book value would be less than fair value)
Add: Equipment acquired by Pride (80% x $200,000) = $160,000
Less: Accumulated depreciation on equipment acquired by Pride [(80% x $200,000)/5] = $32,000
Consolidated total for equipment (net) = $28,000 + $35,000 + $160,000 - $32,000 = $191,000 x 5.6 (to account for the 80% ownership) = $1,064,000. Therefore, the best choice is D.