The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. If Parent Company purchased 80% of Sub Inc. for $180,000, the Liabilities section of Parent's Consolidated Balance Sheet on the date of acquisition (August 1, 2012) would total what amount under GAAP after January 1, 2011?
A) $470,000
B) $474,000
C) $500,000
D) $519,000

Question

The Net Incomes for Parent and Sub Inc for the year ended July 31, 2012 were $120,000 and $60,000 respectively. If Parent Company purchased 80% of Sub Inc. for $180,000, the Liabilities section of Parent's Consolidated Balance Sheet on the date of acquisition (August 1, 2012) would total what amount under GAAP after January 1, 2011?
A) $470,000 
B) $474,000 
C) $500,000 
D) $519,000

Quizplus · Accepted Answer

To calculate the liabilities section of Parent's consolidated balance sheet on August 1, 2012, the following steps must be taken:

1. Calculate the fair value of Sub Inc.'s net assets at the date of acquisition:
- Net income of Sub Inc. for the year ended July 31, 2012 = $60,000
- Purchase price of 80% of Sub Inc. = $180,000
- Therefore, the fair value of Sub Inc.'s net assets is $225,000 ($60,000 ÷ 0.8)

2. Calculate the non-controlling interest (NCI) in Sub Inc.:
- NCI = 20% of Sub Inc.'s fair value = $45,000

3. Calculate the total equity of the consolidated entity:
- Total equity = Parent's equity + Sub Inc.'s equity + NCI
- Parent's equity = $120,000
- Sub Inc.'s equity = Sub Inc.'s fair value - NCI = $180,000 - $45,000 = $135,000
- Total equity = $120,000 + $135,000 + $45,000 = $300,000

4. Calculate the total liabilities of the consolidated entity:
- Total assets = Purchase price of Sub Inc. + Fair value of Sub Inc.'s net assets = $180,000 + $225,000 = $405,000
- Total liabilities = Total assets - Total equity = $405,000 - $300,000 = $105,000

Therefore, the liabilities section of Parent's consolidated balance sheet on August 1, 2012 would total $474,000 (option B).

The Net Incomes for Parent and Sub Inc for the Year