The following information applies to Questions 41-45
On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:
On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill.
-Noncurrent liabilities on the January 2,20X6,consolidated balance sheet should be:
A) $109,000
B) $55,000
C) $104,000
D) $131,000

Question

The following information applies to Questions 41-45
On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:
  On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill.
-Noncurrent liabilities on the January 2,20X6,consolidated balance sheet should be:
A) $109,000 
B) $55,000 
C) $104,000 
D) $131,000

Quizplus · Accepted Answer

To calculate the noncurrent liabilities in the consolidated balance sheet, we need to add the noncurrent liabilities of both companies, and then adjust for any elimination entries or changes due to the acquisition.

Starting with the balance sheets given:

Polka Co. noncurrent liabilities = $40,000 
Strauss Co. noncurrent liabilities = $45,000

Total noncurrent liabilities = $85,000

Next, we need to adjust for the acquisition. Since Polka borrowed $90,000 to fund the acquisition, we need to recognize this as a noncurrent liability.

Total noncurrent liabilities = $85,000 + $90,000 = $175,000

Finally, we need to eliminate any duplication of noncurrent liabilities between Polka and Strauss. Since we do not have any information that would indicate any duplication, we can assume that there is none.

Therefore, the noncurrent liabilities on the consolidated balance sheet should be $175,000.

The correct answer is D, $131,000, is incorrect because it is equal to the total liabilities of both companies combined, without any adjustments or eliminations for the acquisition.

The Following Information Applies to Questions 41-45