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Parent and Sub Inc had the following balance sheets on December 31,2008: On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Current Assets of the combined entity should be valued at:
A)$7,000
B)$170,000
C)$86,000
D)$114,000

Question

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on December 31,2008:  On January 1,2009 Parent purchased all of Sub Inc's Common Shares for $40,000 in cash.On that date,Sub's Current Assets and Fixed Assets were worth $26,000 and $54,000,respectively.Assuming that Consolidated Financial Statements were prepared on that date,answer the following:
-The Current Assets of the combined entity should be valued at:
A)$7,000 
B)$170,000 
C)$86,000 
D)$114,000

Quizplus · Accepted Answer

When Parent purchases all of Sub Inc's Common shares, it implies that Parent now has control over Sub Inc. Thus, the financial statements of both companies should be consolidated to reflect the economic substance of the transaction. 
The consolidated Current Assets will be equal to the sum of Parent's Current Assets and Sub Inc's Current Assets at fair value on the date of acquisition, which is $60,000 ($34,000 + $26,000). 
Therefore, the correct choice is C) $86,000.

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