Question

On January 1, year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:

	Polk	Strass
Current assets	$ 70,000	$ 20,000
Noncurrent assets	90,000	40,000
Total assets	$160,000	$60,000
Current liabilities	$ 30,000	$10,000
Long-term debt	50,000	--
Stockholders' equity	80,000	50,000
Total liabilities and stockholders' equity	$160,000	$60,000

On January 2, year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Strass. This debt is payable in ten equal annual principal payments, plus interest, beginning December 30, year 1. The excess cost of the investment over Strass' book value of acquired net assets should be allocated 60% to inventory and 40% to goodwill. On January 1, year 1, the fair value of Polk shares held by noncontrolling parties was $10,000.

Noncurrent liabilities should be

	$115,000
	$109,000
	$104,000
	$ 55,000

This Answer is Correct (Answer is C, $104,000)

In the consolidated balance sheet, the parent company's "investment in subsidiary" account should be eliminated and replaced by the assets and liabilities of the subsidiary. Therefore, the consolidated balance sheet should include the noncurrent liabilities of both companies, plus the noncurrent portion of the debt incurred on 1/2/Y1 ($60,000 − $6,000 = $54,000).

Noncurrent liabilities—Polk	$ 50,000
Noncurrent liabilities—Strass	0
Noncurrent portion of new debt	54,000
Total	$104,000

Can please explain this question and all calculations step by step in a very easy way so I can understand regardless of the explanation above because I really don't understand it? Also where do they get $60,000 and $6,000? which when subtracted equals the noncurrent portion of the debt incurred on 1/2/Y1 ($60,000 − $6,000 = $54,000)?

Answer 1

In the given case when the company invest in another company more than 50% of its share then the financial statements made by combining both the companies are called consolidated financial statements. In consolidation the financials of the parents and subsidiary are combined together.

Here the Polk Corp. has purchased 90% of common shares of Strass corp. It means that the Polk has become a parent company and strass has become a subsidiary company. Here the shares are purchased by using the borrowing of $ 60,000 for 10 years.

Here the borrowing cost will be treated as non current liabilities for polk corp. as it is to be paid in 10 years but point to be noted is that the borrowing will be paid each year an equal amount that means the borrowing payable per year of $ 6000 ( 60000/10 years).

Further borrowing portion payable in current year is to be treated as current liabilities.

Thus for year non current liabilities for borrowing Portion will be $ 54000 i.e (60000- 6000).

In case of consolidation the assets and liabilities of both the companies gets combined here there is no non current liabilities for Strass corp. Only polk has long term debt and the borrowing made this year as non current liabilities.

So the total non current liabilities = $ 60,000 existening + $ 54000 current year borrowing.

Thus non current liabilities should be = $ 104,000.

Hence the correct option is ------ C i.e $ 104,000.