Red Co. acquired 100% of Green, Inc. on January 1, 2010. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2010. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 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, 2010 related to the acquisition allocations of Green?
A) $43,000.
B) $33,000.
C) $5,000.
D) $15,000.
E)0.

Question

Quizplus · Accepted Answer

The allocation of the fair value of the building and equipment will result in depreciation expense in the consolidated financial statements. The building's annual depreciation expense will be ($390,000 - $200,000) / 10 years = $19,000. The equipment's annual depreciation expense will be ($280,000 - $350,000) / 5 years = ($70,000) / 5 years = $14,000 per year.

There will be no expense related to the difference between the book value and fair value of the inventory because Green has not yet sold the inventory.

Therefore, the total expense related to the acquisition allocations will be $19,000 + $14,000 = $33,000. Answer choice D is correct.

Red Co Acquired 100% of Green, Inc