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?

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?

Quizplus · Accepted Answer

The equipment was undervalued by $35,000 and was allocated $28,000. Therefore, the original cost of the equipment is $35,000 + $28,000 = $63,000. Since it has a five-year life it would have a remaining value of $31,500 at December 31, 2011 (assuming straight-line depreciation is used). 
Therefore, the net amount of equipment on the consolidated balance sheet would be calculated as follows: 
Cost of equipment acquired by Pride: $28,000 
Original cost of equipment: $63,000 
Accumulated depreciation through December 31, 2011: $6,300 ($31,500 x 20%) 
Net equipment: $84,700 
Consolidated total for equipment (net) at December 31, 2011 is: 
80% x $84,700 + Pride’s own equipment of $980,000 = $1,064,000.