Question

A parent company acquires all of a subsidiary's voting stock at the beginning of 2018. At the date of acquisition, the subsidiary's equipment had a book value of $40 million and a fair value of $15 million. The equipment had a 10-year remaining life, straight-line.

Consolidation eliminating entry (O), on the consolidation working paper for 2021, has what effect on consolidated depreciation expense?

Select one:

A. Debit for $2.5 million

B. Credit for $2.5 million

C. Debit for $10 million

D. Credit for $10 million

Answer 1

B. Credit for $2.5 million

The depreciation expense to be recorded in the subsidiary individual accounts in respect of equipment is given below:

Depreciation expense to recorded in subsidiary accounts=$40 million/10 =$4 million

Since for the consolidated accounts we consider the fair value of the assets of the subsidiary and not the book values of assets, so for the purpose of consolidation, the depreciation expense of the equipment shall be recorded based on its fair value and not its book value in the following manner:

Depreciation expense to recorded in consolidated accounts=$15 million/10 = $1.5 million

Effect on consolidated depreciation expense= depreciation expense recorded in subsidiary accounts-depreciation expense recorded in consolidated accounts

Effect on consolidated depreciation expense=$4 million-$1.5 million

=$2.5 million