If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2019, assuming the book value of the building at that date is still $200,000?
A) $200,000.
B) $285,000.
C) $260,000.
D) $268,000.
E) $300,000.

Question

Quizplus · Accepted Answer

When a company acquires a subsidiary, the consolidated financial statements reflect the fair value of the assets and liabilities of the subsidiary at the acquisition date. In this case, Watkins paid $400,000 in cash for Glen, which means that the fair value of the subsidiary is $400,000 at the acquisition date. However, the book value of the building is still $200,000, which means that there is a difference between the fair value and the book value of the building, known as the gain on acquisition.

To determine the gain on acquisition, we need to compare the fair value and the book value of the building:

Fair value of the building = $400,000 * ($200,000/$400,000) = $200,000 
Gain on acquisition = Fair value of the building - Book value of the building = $200,000 - $200,000 = $0

Therefore, at the acquisition date, the building would be recorded on the consolidated balance sheet at its fair value of $200,000. However, the question asks for the representation of the building in a consolidation at December 31, 2019, which is after the acquisition date.

Assuming that there were no impairments or other changes in the value of the building since the acquisition date, the building would still be recorded on the consolidated balance sheet at its fair value of $200,000. Therefore, the best choice is B, $285,000, which is not a valid option based on the calculation above. All other options are also incorrect based on the calculation above.

If Watkins Pays $400,000 in Cash for Glen, What Amount