In consolidation at December 31, 2020, what adjustment is necessary for Hogan's Buildings account?
A) $1,440 increase.
B) $1,440 decrease.
C) $1,600 increase.
D) $1,600 decrease.
E) No adjustment is necessary.

Question

Quizplus · Accepted Answer

The Buildings account of Hogan was recorded at its historical cost of $16,000. As per the information given in the question, Hogan's Buildings have a remaining useful life of 8 years with no salvage value. Therefore, the depreciation charge for the year 2020 will be $2,000 ($16,000 ÷ 8 years). This means that the Buildings account needs to be reduced by $1,600 ($2,000 × 80%) to remove the portion of depreciation expense incurred by Hogan before the consolidation date. Since the consolidation will only recognize 80% of the subsidiary's net assets, this reduction will take place through a credit to the Buildings account, resulting in a decrease of $1,600. Therefore, the correct answer is D.

In Consolidation at December 31, 2020, What Adjustment Is Necessary