In: Accounting
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
Solution: In the case of the fair value, there will be adjustments regarding extra depreciation.
Extra depreciation = fair value movement/remaining useful life
= $210,000/10 years
= $21,000 [since the expenses are increasing, we can denominate as positive]
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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