Question

Black Co. acquired 100% of Blue, Inc. on January 1, 2020. On that date, Blue had land with a book value of $38,000 and a fair value of $49,000. Also, on the date of acquisition, Blue had a building with a book value of $250,000 and a fair value of $460,000. Blue had equipment with a book value of $340,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2020 related to the acquisition allocations of Blue

Answer 1

The total expense in the consolidated financial statements for the year ended December 31, 2020 related to the acquisition allocations of Blue is $21,000.

Step-by-step explanation:

When Black Co. acquired 100% of Blue, Inc., the acquisition allocations for the land, building, and equipment would be recorded in the consolidated financial statements. The difference between the fair value and book value of each asset is called the goodwill. For the land, there would be no expense as the fair value and book value are the same. However, for the building and equipment, the excess fair value over the book value would be allocated to expense over their remaining useful lives.

The total expense related to the acquisition allocations for the year ended December 31, 2020 would depend on the allocation of the excess fair value of the building and equipment. Assuming a straight-line depreciation method, the annual expense for the building would be ($460,000 - $250,000) / 10 years = $21,000. The annual expense for the equipment would be ($280,000 - $340,000) / 5 years = -$12,000. As negative expenses cannot be recognized, the annual expense for the equipment would be $0.

Therefore, the total expense in the consolidated financial statements for the year ended December 31, 2020 related to the acquisition allocations of Blue would be $21,000.

Answer 2

Black Co.

Total expenses for the year ended December 31, 2020 related to the acquisition allocations of Blue are:

= $102,000

Step-by-step explanation:

a) Data and Calculations:

Assets of Blue Corporation:

Book Value Fair Value Depreciation Expense

Land $38,000 $49,000 $0

Building 250,000 460,000 46,000

Equipment 340,000 280,000 56,000

Total $628,000 $789,000 $102,000

Remaining useful life:

Building = 10 years

Equipment = 5 years

Straight-line Depreciation:

Building = $46,000 ($460,000/10)

Equipment = $56,000 ($280,000/5)