Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2010 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid. What is the consolidated balance of the Equipment account at December 31, 2011?

Question

Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2010 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid.  What is the consolidated balance of the Equipment account at December 31, 2011?

Quizplus · Accepted Answer

The consolidated balance of the Equipment account at December 31, 2011 can be calculated as follows:

Royce's share of Park's equipment at acquisition = 0.6 x ($700,000 - $420,000) = $168,000

Adjustment to fair value of Park's equipment at acquisition = $140,000

Depreciation expense on the adjusted fair value of Park's equipment for one year = ($700,000 - $140,000) / 10 years x 1 year = $56,000

Royce's share of Park's net income for one year = 0.6 x $160,000 = $96,000

Consolidated balance of the Equipment account = Royce's share of Park's equipment at acquisition + adjustment to fair value of Park's equipment at acquisition - depreciation expense on the adjusted fair value of Park's equipment for one year + Royce's share of Park's net income for one year

= $168,000 + $140,000 - $56,000 + $96,000

= $348,000

Consolidated balance of the Equipment account at December 31, 2011 is therefore $348,000. However, this is only Royce's share of the equipment. To get the consolidated balance, we need to add Park's share of the equipment, which is $700,000 - $140,000 = $560,000.

Consolidated balance of the Equipment account at December 31, 2011 = Royce's share of the equipment + Park's share of the equipment

= $348,000 + $560,000

= $908,000

Therefore, the correct answer is D) $770,000.

Royce Co Acquired 60% of Park Co