Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | }
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l }
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective?

Question

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
 $$\begin{array} { | l | l | l | } 
\hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \
\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \
\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \
\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \
\hline \begin{array} { l } 
\text { Total Liabilities and } \
\text { Shareholders' Equity }
\end{array} & \$ 37,234 & \$ 5,379 \
\hline
\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.
-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective?

Quizplus · Accepted Answer

Total liabilities in the consolidated financial statements would be the sum of the parent and child company's total liabilities and the tax liability from the excess price allocation. Therefore, the calculation is: $23,467 (Parent Company total liabilities) + $3,764 (Child Company total liabilities) + ($1,500 x 0.34) = $27,741. Therefore, the correct answer is (C).

Parent Company Inc Also Assume the Following Information: the Acquisition Was Accounted for Year