When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000.
-What amount should have been reported for the land in a consolidated balance sheet, assuming the investment was obtained prior to January 1, 2009 and the purchase method of accounting for business combinations was used?
A) $70,000.
B) $75,000.
C) $85,000.
D) $92,500.
E) $100,000.

Question

Quizplus · Accepted Answer

Under the purchase method of accounting for business combinations, the assets and liabilities of the acquired company are recorded at their fair values on the acquisition date. Therefore, Yelts' land would be recorded at fair value of $100,000. Since Jolt acquired 75% of Yelts' common stock, it would record 75% of the fair value of the land, which is $75,000. However, since there was already $70,000 of the land's value recorded on Yelts' books, the additional amount that would be recorded is $5,000 (75% of the excess fair value over book value). Therefore, the consolidated balance sheet would show the land at $92,500 ($70,000 + $22,500).