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, at the time of the transfer, Selvick Company should record
A) the building at $220,000 and accumulated depreciation of $44,000.
B) the building at $220,000 with no accumulated depreciation.
C) the building at $176,000 with no accumulated depreciation.
D) the building at $250,000 with no accumulated depreciation.

Answer 1

Selvick Company should record the building at its appraised fair value of $250,000 with no accumulated depreciation at the time of the transfer from Peacock Company.

Step-by-step explanation:

The student has a question about accounting for asset transfers in a business transaction between a parent company and its subsidiary. At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. After 4 years and using straight-line depreciation with a 20-year useful life and no salvage value, they transferred these assets to a subsidiary, Selvick Company.

The accumulated depreciation for the building is calculated as ($220,000 / 20) * 4 = $44,000. At the time of the transfer, Selvick Company should record the building at its fair value because the transfer constitutes a fresh start for the asset in the books of the subsidiary. Therefore, the correct answer is D) the building at $250,000 with no accumulated depreciation. The value mentioned in the appraisal overrides the book value for recording purposes in the subsidiary's books.