Question: Bailey, Inc., buys 60 percent of the outstanding stock of Luebs, Inc., in a purchase that resulted in the recognition of goodwill. Luebs owns a piece of land that cost $200,000, but was worth $500,000 at the date of purchase. What value would be attributed to this land in a consolidated balance sheet at the date of takeover?
Economic Proportionate Parent Company
Unit Concept Consolidation Concept
a. $500,000 300,000 $500,000
b. $200,000 $120,000 $500,000
c. $200,000 $120,000 $380,000
d. $500,000 $300,000 $380,000
The answer is d.
Generally, the economic unit approach includes in consolidated financial statements the entire fair market value of the subsidiary's assets as of the date the parent obtains control over the subsidiary. Minority interests in subsidiary net assets are considered to be part of a consolidated stockholders' equity. Therefore, under an economic unit approach, the value of land should be recorded at a market value of $500,000. ...
This solution is comprised of a detailed explanation of about 270 words, which discusses the value concept related to the land at the date of takeover. Any required calculations are shown.