Question :
Q1. Willkom Corporation bought 100 percent of Szabo, Inc., on 1st January, 2011. On that date, Willkom's equipment (10-year life) has a book value of $300,000 but a fair value of $400,000. Szabo has equipment 10-year life with a book value of $200,000 but a fair value of $300,000. Willkom utilize the equity technique to record to record its investment in Szabo. On 31st December, 2013, Willkom has equipment with a book value of $210,000 but a fair value of $330,000. Szabo has equipment with a book value of $140,000 but a reasonable value of $270,000. The consolidated balance for the Equipment account as of 31st December, 2013 is $420,000.
What could be the impact on consolidated balance for the Equipment account as of 31st December, 2013 if the parent had applied the initial value technique rather than the equity method?
a. The balance in the consolidated Equipment account can't be evaluated for the initial value technique using the information given.
b. No effect: The technique the parent uses is for internal reporting purposes only and has no impact on consolidated totals.
c. The consolidated Equipment account could have a lower reported balance.
d. The consolidated Equipment account could have a higher reported balance
Q2.
Willkom Corporation bought 100% of Szabo, Inc., on January 1, 2011. On that date, Willkom's equipment (10-year life) has a book value of $300,000 but a fair value of $400,000. Szabo has equipment (10-year life) with a book value of $200,000 but a fair value of $300,000. Willkom uses the equity technique to record its investment in Szabo. On 31st December, 2013, Willkom has equipment with a book value of $210,000 but a fair value of $330,000. Szabo has equipment with a book value of $140,000 but a reasonable value of $270,000. Evaluate the consolidated balance for the Equipment account as of 31st December, 2013?
Q3.
On 1st January, 2011, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona, Inc. for $600,000 cash. At 1st January, 2011, Sedona's total assets had a net carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any outstanding excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity technique to account for its investment in Sedona. Every year since the acquisition, Sedona has paid a $20,000 dividend. Sedona recorded income of $70,000 in 2011 and $80,000 in 2012.
Selected account balances from the two companies' individual records were as given:
Phoenix Sedona
2013 Revenues $498,000 $285,000
2013 Expenses 350,000 195,000
2013 Income from Sedona 55,000
Retained earnings 12/31/13 250,000 175,000