On January 1,2012,Pharma Company purchased 16,000 of the 20,000 outstanding common shares of Sludge Company for $760,000.On January 1,2016,Pharma Company sold 2,000 of its shares of Sludge Company on the open market for $90 per share.Sludge Company's stockholders' equity on January 1,2012,and January 1,2016,was as follows: The difference between implied and book value is assigned to Sludge Company's land.Assuming no other equity transactions,the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31,2016 would be:

Question

On January 1,2012,Pharma Company purchased 16,000 of the 20,000 outstanding common shares of Sludge Company for $760,000.On January 1,2016,Pharma Company sold 2,000 of its shares of Sludge Company on the open market for $90 per share.Sludge Company's stockholders' equity on January 1,2012,and January 1,2016,was as follows:  The difference between implied and book value is assigned to Sludge Company's land.Assuming no other equity transactions,the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31,2016 would be:

Quizplus · Accepted Answer

The implied value of Sludge Company is calculated as follows: 
16,000/20,000 x Stockholders' equity on January 1, 2012 = 16,000/20,000 x $580,000 = $464,000 
Book value of shares purchased = $760,000 
Difference between implied and book value = $760,000 - $464,000 = $296,000

When Pharma Company sells 2,000 of its shares on the open market, the number of outstanding shares of Sludge Company becomes 18,000 (20,000 - 16,000 + 2,000).

The implied value of Sludge Company on January 1, 2016 is: 
16,000/18,000 x Stockholders' equity on January 1, 2016 = 16,000/18,000 x $825,000 = $732,000

The book value of Pharma Company's shares on January 1, 2016 is: 
16,000/20,000 x Stockholders' equity on January 1, 2016 = 16,000/20,000 x $825,000 = $660,000

The difference between implied and book value on January 1, 2016 is: 
$732,000 - $660,000 = $72,000

This difference is assigned to Sludge Company's land. Therefore, the amount added to land on December 31, 2016, assuming no other equity transactions, would be: 
$296,000 - $72,000 = $224,000 
However, this amount is only the difference between implied and book value as of January 1, 2016. To determine the amount added to land on December 31, 2016, we need to calculate the implied value of Sludge Company as of that date. Since no other equity transactions are assumed, the implied value of Sludge Company on December 31, 2016, will be the same as on January 1, 2016, i.e., $732,000.

The book value of Pharma Company's shares on December 31, 2016, is calculated as follows: 
16,000/20,000 x Stockholders' equity on December 31, 2016 = 16,000/20,000 x $1,080,000 = $864,000

The difference between implied and book value on December 31, 2016, is: 
$732,000 - $864,000 = -$132,000

Since the implied value is less than the book value, there is no difference to be added to land on the work paper. Therefore, the correct answer is C) $105,000, which is the amount of difference between implied and book value as of January 1, 2016, that is assigned to land.

On January 1,2012,Pharma Company Purchased 16,000 of the 20,000 Outstanding