Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities: If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2022, assuming the book value of the building at that date is still $200,000?

Question

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:  If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2022, assuming the book value of the building at that date is still $200,000?

Quizplus · Accepted Answer

When acquiring a subsidiary, the parent company records the assets and liabilities of the subsidiary at their fair value as of the acquisition date. Therefore, the building would have been recorded at $200,000 on January 1, 2020.

In subsequent periods, the parent company uses the equity method to record its share of the subsidiary's net income or loss. However, for consolidation purposes, the parent company must eliminate any intercompany transactions, including the impact of the purchase price on the subsidiary's assets.

Since Watkins paid $450,000 for Glen, there was an excess purchase price of $250,000 ($450,000 - $200,000) allocated to the subsidiary's assets. This excess purchase price is recorded as goodwill on the parent company's consolidated balance sheet.

Therefore, the building would still be recorded at $200,000 on the subsidiary's books at December 31, 2022. However, for consolidation purposes, the building would be eliminated along with the excess purchase price of $250,000. This leaves total consolidated assets at $450,000 ($200,000 building + $250,000 goodwill), so the answer is B) $285,000.