Question

During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000.
1. Based on the information provided, at the time of the transfer, Regan Company should record:

(1) Building at $180,000 and no accumulated depreciation.

(2) Building at $162,000 and no accumulated depreciation.

(3) Building at $200,000 and accumulated depreciation of $24,000.

(4) Building at $180,000 and accumulated depreciation of $18,000.

2. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

(1) $312,000

(2) $180,000

(3) $330,000

(4) $150,000

3. Based on the preceding information, Regan Company will report

(1) additional paid-in capital of $0.

(2) additional paid-in capital of $150,000.

(3) additional paid-in capital of $162,000.

(4) additional paid-in capital of $180,000.

Expert Answer

Answer 1

Answer:

1. (4) Building at $180,000 and accumulated depreciation of $18,000.

2. (1) $312,000

3. (3) additional paid-in capital of $162,000.

Explanation:

1. The purchase price of building is $180,000

And the depreciation based on straight line method with a life of 30 years for each year = $180,000/30 = $6,000

Therefore, accumulated depreciation for 3 years = $6,000 $\times$ 3 = $18,000

2. Total amount of assets given to subsidiary shall be the cost, and value of investment in books = $100,000 of land + ($180,000 - $18,000) of building after depreciation + $50,000 cash given

Therefore total value of investment shall be $312,000

3. Additional paid in capital = Total value of investment - Cost of shares (par value of shares)

= $312,000 - ($10 $\times$ 15,000 shares) = $312,000 - $150,000

= $162,000