Black Co. acquired 100% of Blue, Inc. on January 1, 2020. On that date, Blue had...

Black Co. acquired 100% of Blue, Inc. on January 1, 2020. On that date, Blue had land with a book value of $38,000 and a fair value of $49,000. Also, on the date of acquisition, Blue had a building with a book value of $250,000 and a fair value of $460,000. Blue had equipment with a book value of $340,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2020 related to the acquisition allocations of Blue

Expert Solution

Solution: In the case of the fair value, there will be adjustments regarding extra depreciation.

In the case of land, there will be no depreciation charged.
In the case of Building, there is a fair value upward occurred so we have to charge an extra depreciation (expense).

Extra depreciation = fair value movement/remaining useful life

= $210,000/10 years

= $21,000 [since the expenses are increasing, we can denominate as positive]

Equipment, there is a fair value downward, instead of extra depreciation, we will have reduction in depreciation, so we have to reduce the extra depreciation already charged in the books of accounts.

Reduction in depreciation expense = $60,000 fair value downward/5 year remaining life

= ($12,000) [there is a reduction in depreciation expense, so we deduct it]

Net effect = $21,000 increase in expense - $12,000 decrease in expense

= $9,000 increase in expense.

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ekkarill92 answered 5 months ago

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