Question

P company purchased a 70% interest in S company on January 1, 2015 for $2,000,000. The book value and fair value of the assets and liabilities of S company on that day were:

                                                BOOK VALUE                     FAIR VALUE

Current assets                   $700,000                              700,000

Equipment                         1,600,000                             2,000,000

Land                                      500,000                                 700,000

Deferred charge               400,000                                 400,000

Total Assets                       3,200,000                             3,800,000

Less: Liabilities                 (700,000)                             (700,000)

Net Assets:                         2,500,000                             3,100,000

The equipment had a remaining useful life of 8 years on January 1, 2015 and the deferred charge was being amortized over a period of 10 years from that date. C/S was $1,700,000 and Retained Earnings was $110,000 on that same date. P company uses partial-equity method to record its investment within S company.

Create the December 31, 2015 work paper entries that:

1. Eliminate the investment account
2. Allocate and amortize the difference between implied value and book value

Answer 1

solution :

given that Rundle Freight Company owns a truck that cost $33,000.

also given that Currently, the truck’s book value is $27,000, and its expected remaining useful life is five years

mentioned in gi ven indormation that

Rundle has the opportunity to purchase for $28,000 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $7,000 per year more than fuel cost for the new truck.

some other given information The old truck is paid for but, in spite of being in good condition, can be sold for only $16,000.

Calculating the total relevant costs:

	retaining truck	replacing truck
cost of the new truck	$-	$28000
additional fuel cost (5*7000)	$35000	$-
oppurtunity cost	$16000	$-
total cost	$51000	$28000

final decision of retaining old truck :

the purchase cost of ol;d truck and book value are irrelevant

they are sunk cost

therefore they should not be considered

the comparision cost of replacing and retaining truck are given above

from the above table

the company should replace the old truck as it would cost $28000 in replacement as against the cost of reraining truck of $51000