Question

At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. After exactly 4 years, it transferred these assets and cash of $75,000 to a newly created subsidiary, Selvick Company, in exchange for 25,000 shares of Selvick's $5 par value stock. Peacock uses straight-line depreciation. When purchased, the building had a useful life of 20 years with no expected salvage value. An appraisal at the time of the transfer revealed that the building has a fair value of $250,000.

Based on the information provided, what amount would be reported by Peacock Company as investment in Selvick Company common stock?
A) $125,000
B) $250,000
C) $301,000
D) $345,000

Answer 1

The amount reported by Peacock Company as investment in Selvick Company common stock is $301,000. This total includes the book value of the building and land, and the additional cash transferred, irrespective of the appraisal value of the building or the par value of the Selvick's stock.

Step-by-step explanation:

To determine the amount that would be reported by Peacock Company as investment in Selvick Company common stock, we must first calculate the book value of the building and land at the time of the transfer to Selvick Company. The cost of the building was $220,000, and it was being depreciated using straight-line depreciation over 20 years, with no expected salvage value. Therefore, the annual depreciation expense would be $11,000 ($220,000 / 20 years). After 4 years, the accumulated depreciation would be $44,000 ($11,000 x 4 years), and the book value of the building would be $176,000 ($220,000 - $44,000).

The land remains at its historical cost since land is not depreciated. Thus, its book value is still the initial purchase price of $50,000. Now, adding the book value of the building ($176,000), the value of the land ($50,000), and the cash transferred ($75,000), we get a total book value of $301,000. Keeping in mind the par value of the shares does not affect the investment amount because Peacock Company traded assets and cash for the shares, not purchased them at par. However, we must consider the fair value of the building, which is appraised at $250,000. Despite the higher appraisal value, for investment purposes, the book value of the assets given up is the relevant measure. Therefore, the amount Peacock Company would report as investment in Selvick Company common stock is $301,000, which corresponds to option C).