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 preceding information, Selvick Company will report additional paid-in capital of
A) $125,000.
B) $176,000.
C) $220,000.
D) $250,000.

Answer 1

Selvick Company will record additional paid-in capital of $250,000, calculated as the excess of assets transferred value ($375,000) over the par value of the shares issued ($125,000).

Step-by-step explanation:

At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. The building's depreciation would be $220,000 / 20 years = $11,000 per year. Over 4 years, this totals $44,000 in depreciation, leaving the building with a book value of $176,000 (i.e., $220,000 - $44,000). When transferred to Selvick Company, the building had a fair value of $250,000, and the land still valued at its original price of $50,000. Together with the cash of $75,000, Peacock transferred a total of $375,000 ($250,000 + $50,000 + $75,000) in assets to Selvick Company for 25,000 shares. Since the shares have a par value of $5 each, the total par value is $125,000 (25,000 shares * $5). The additional paid-in capital is the excess of the transferred assets' value over the par value of the shares, which is $375,000 - $125,000 = $250,000.