On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is consolidated stockholders' equity at January 2, 2019?

Question

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is consolidated stockholders' equity at January 2, 2019?

Quizplus · Accepted Answer

The first step is to adjust Spraz's book value for the excess consideration transferred. Since the excess is allocated 60% to inventory and 40% to goodwill, we have:

Inventory fair value adjustment: 0.6 × ($120,000 − $80,000) = $24,000
Goodwill recognized: 0.4 × ($120,000 − $80,000) = $16,000

The adjusted balance sheet for Spraz is:

Cash	$40,000
Accounts Receivable	20,000
Inventory	104,000 ($80,000 + $24,000)
Property, Plant, and Equipment (net)	180,000
Goodwill	16,000
Total Assets	$360,000
Accounts Payable	$40,000
Common Shares	100,000
Retained Earnings	220,000
Total Liabilities and Equity	$360,000

Next, we calculate the amount of consideration transferred by Palk for the 80% interest in Spraz:

Purchase price: 0.8 × $400,000 = $320,000

Since we know that Palk borrowed the entire purchase price, the consolidated balance sheet on January 2, 2019, is simply the sum of Palk's and Spraz's adjusted balances:

Cash	$68,000 ($40,000 + $28,000)
Accounts Receivable	40,000 ($20,000 + $20,000)
Inventory	220,000 ($104,000 + $96,000 + $20,000)
Property, Plant, and Equipment (net)	360,000 ($180,000 + $180,000)
Goodwill	16,000
Total Assets	$704,000
Accounts Payable	$40,000
Long-Term Borrowings	84,000
Common Shares	200,000 ($100,000 + 0.8 × $100,000)
Retained Earnings	380,000 ($220,000 + 0.8 × $300,000)
Total Liabilities and Equity	$704,000

Consolidated stockholders' equity at January 2, 2019, is the sum of Palk's and Spraz's common shares and retained earnings, which is:

Common Shares: $100,000 + 0.8 × $100,000 = $180,000
Retained Earnings: $220,000 + 0.8 × $300,000 = $460,000
Consolidated Stockholders' Equity: $180,000 + $460,000 = $640,000

Therefore, the correct answer is B)$133,000.