Question

Subs Ltd owns a machine that cost $200,000, which was to be depreciated over 10 years on a straight-line basis (zero residual value).

What would the accumulated depreciation be after three years? $ ____

What would the carrying amount be after three years? $ ____

Assume Parent Ltd acquired all of the shares in Subs Ltd at this time. As part of the acquisition analysis, the fair value of the machine was estimated to be $154,000.

The revaluation did not take place in the records of Subs Ltd, so an adjustment was made in the consolidation worksheet.

How much is the revaluation increment? $ ____

Assuming a tax rate of 30%, what would be the value of the Deferred Tax Liability created due to this difference between carrying amount and fair value? $ ____

What was the depreciation expense per year based on the original data? $ ____

What would the new depreciation expense be per year if the revaluation actually took place? $ ____

From the Group’s point of view, this asset has been under-depreciated as the Group perceives its value to be higher than what is recorded by the subsidiary.

A consolidation entry would therefore be required to increase both the Depreciation Expense and Accumulated Depreciation by how much per year? $ ____

Recording this additional depreciation expense would then impact profit and tax expense.

By adjusting for more depreciation expense per year in the consolidation entries, tax expense will reduce by how much per year? $ ____

The DTL created by the revaluation adjustment at consolidation was $4,200.

The DTL will reverse away over the remaining useful life of the asset, which is how many years?

Remember that no consolidation entries are recorded in the accounting records of the parent or subsidiary, so they must be repeated year after year. However, only entries relating to the current year’s incomes and expenses can be adjusted to those specific accounts. Anything prior to the current year must be adjusted to Retained Earnings, since each year the P/L Summary account is closed to Retained Earnings.

Assume it is now four years after the parent acquired the subsidiary, so entries to account for four years’ worth of depreciation and tax adjustments are required. Based on the information above, complete the following journal entries:

Dr Depreciation Expense $ ____

Dr Retained Earnings $ ____

Cr Accumulated Depreciation $ ____

Dr Deferred Tax Liability $ ____

Cr Income Tax Expense $ ____

Cr Retained Earnings $ ____

Answer 1

Since, the question has multiple sub-parts, I have answered the first six.

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Part 1)

What would the accumulated depreciation be after three years? $60,000

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Explanation:

The value of accumulated depreciation after 3 years is determined as below:

Annual Depreciation = (Cost of Machine-Residual Value)/Estimated Life = (200,000-0)/10 = $20,000

Accumulated Depreciation after Three Years = Annual Depreciation*Number of Years = 20,000*3 = $60,000

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Part 2)

What would the carrying amount be after three years? $140,000

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Explanation:

The carrying amount after 3 years is calculated as follows:

Carrying Amount after 3 Years = Cost of Machine - Accumulated Depreciation after Three Years = 200,000 - 60,000 = $140,000

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Part 3)

How much is the revaluation increment? $14,000

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Explanation:

The amount of revaluation increment is arrived as follows:

Revaluation Increment = Fair Value of Machine - Carrying Amount of Machine after Three Years = 154,000 - 140,000 = $14,000

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Part 4)

Assuming a tax rate of 30%, what would be the value of the Deferred Tax Liability created due to this difference between carrying amount and fair value? $4,200

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Explanation:

The value of deferred tax liability is calculated as below:

Deferred Tax Liability = Tax Rate*(Fair Value of Machine - Carrying Amount of Machine after Three Years) = 30%*(154,000 - 140,000) = $4,200

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Part 5)

What was the depreciation expense per year based on the original data? $20,000

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Explanation:

The value of depreciation expense with original data is determined as follows:

Annual Depreciation Expense = Cost of Machine/Estimated Life = 200,000/10 = $20,000

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Part 6)

What would the new depreciation expense be per year if the revaluation actually took place? $22,000

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Explanation:

The value of new depreciation expense is calculated as below:

New Depreciation Expense = Revised Value of Machine/Remaining Useful Life = 154,000/7 = $22,000