Question

A subsidiary has plant assets with a fair value of $100 million and book value of $60 million at the date of acquisition. The plant assets have a remaining life, as of the date of acquisition, of 20 years, straight-line. You are consolidating the accounts at the end of the third year since acquisition, and the subsidiary still owns the plant assets. The amounts for eliminating entry (R) and (O) are (respectively):

a-$40 million and $4 million
b- $36 million and $2 million
c-$34 million and $0
d - $32 million and $5 million

Answer 1

Option "B" is the correct answer to the following question

Explanation:

Given:

Fair value of plant = $100 million

Book value of plant = $60 million

Estimated life = 20 year

Computation of gain on revaluation:

Gain on revaluation = Fair value of plant - Book value of plant

Gain on revaluation = $100 million - $60 million

Gain on revaluation = $40 million

Computation of per year extra wright off :

Per year extra wright off = $40 million / 20 year

Per year extra wright off = $2 million per year

Two-year elimination amount is 2-year × Per year extra wright off

Two-year elimination amount is $4 million

Opening balance of third-year amortization is $40 million - $4 million = $36 million

So, the amount of eliminating entry is $36 million and write off the value of $2 million