I thought I understood consolidation pretty well but now I'm confused all over again.
Big Company buys 80 percent of the outstanding shares of Little Company on January 1, Year One. Big paid an amount that was in excess of the underlying fair value of the subsidiary's assets and liabilities so that this was not viewed as a bargain purchase. On that date, Little had land worth $500,000 but with a book value of $300,000. Several years later, when Little still held this land as well as other parcels of land, Big reported a Land account of $1.1 million and Little reported a Land account of $700,000. Assume no asset impairments have taken place. What is the consolidated balance to be reported for land?
A $1.66 million
B $1.82 million
C $1.96 million
D $2.00 million
Answer is D. I chose B because I thought 20% has to be allocated to the non controlling interest.
At the time of the acquisition, Little's land was worth $200,000 more than its book value. That establishes the basis to Big; $200,000 of the acquisition is allocated to this land. Although only 80 percent of Little was acquired, that is not relevant to the reporting of land. Subsequently, until the land is sold, the $200,000 allocation is included each period for consolidation purposes. Here, Big reports $1.1 million while Little reports $700,000. Adding in the $200,000 allocation from the original acquisition brings the consolidated total to $2 million. –
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