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 information provided,what amount would be reported by Peacock Company as investment in Selvick Company common stock?

Question

Quizplus · Accepted Answer

To calculate the investment in Selvick Company common stock, we need to find the book value of the assets transferred to Selvick and compare it with the fair value of the shares received in exchange.

Book Value of Assets Transferred:
- Land: $50,000 (no depreciation, no change in value)
- Building: 
    - Original Cost: $220,000
    - Depreciation per year: $220,000/20 = $11,000
    - Accumulated Depreciation after 4 years: $11,000*4 = $44,000
    - Book Value after 4 years: $220,000 - $44,000 = $176,000

Total Book Value of Assets Transferred: $50,000 + $176,000 = $226,000

Fair Value of Shares Received: 25,000 shares * $5 par value = $125,000

Since the fair value of the shares received ($125,000) is less than the book value of the assets transferred ($226,000), we need to reduce the investment in Selvick Company to the fair value of the consideration given. As a result, the amount to be reported by Peacock Company as investment in Selvick Company common stock is $125,000.

Therefore, the best choice is C.

At Its Inception,Peacock Company Purchased Land for $50,000 and a Building