DC Company purchased 100% of the outstanding common shares of FA Company on December 31, 20X3, for $170,000. At that date, FA had $100,000 of outstanding common shares and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no residual value. Inventory turns over four times a year.
- What adjustment should be made to the consolidated financial statements for the year ended December 31, 20X6, for the fair value increment related to the capital assets?
A)The retained earnings at January 1, 20X6, will be increased by $20,000.
B)Amortization expense on the capital assets for 20X6 will be increased by $2,500.
C)Amortization expense on the capital assets for 20X6 will be increased by $7,500.
D)Retained earnings at the end of 20X6 will be increased by $12,500.

Question

Quizplus · Accepted Answer

The fair value increment related to the capital assets is $20,000, which should be amortized over their remaining useful life of eight years. This results in an annual amortization expense of $2,500 ($20,000 / 8 years).

DC Company Purchased 100% of the Outstanding Common Shares of FA