Cooper Ltd.acquired 70% of the common shares of Effy Ltd.at January 2,20X1.At December 31,20X3,Effy sold a machine to Cooper for $180,000.Effy had purchased the machine a few years ago for $250,000.At the time of sale to Cooper,the machine had a carrying value of $150,000 and a remaining useful life of 6 years.Both companies do not claim amortization for assets purchased in the second half of the year.For Cooper's December 31,20X3 consolidated financial statements,what net book value should be shown for the machine?
A)$125,000
B)$150,000
C)$180,000
D)$250,000

Question

Quizplus · Accepted Answer

Since Cooper acquired 70% of Effy's common shares, Cooper has control over Effy and therefore must prepare consolidated financial statements. When Effy sold the machine to Cooper, the selling price of $180,000 is considered an intercompany sale since it involves two companies within the same group. Therefore, the net book value of the machine should be eliminated from Effy's financial statements, and the remaining value should be adjusted in Cooper's consolidated financial statements.

Effy's net book value of the machine at the time of sale was $150,000. Since the remaining useful life of the machine was 6 years, the annual amortization expense would be $16,666.67 ($100,000/6). Since both companies do not claim amortization for assets purchased in the second half of the year, Effy's amortization expense for 20X3 will be half of the annual expense, which is $8,333.33 ($16,666.67/2). Therefore, the adjusted net book value for the machine in Cooper's consolidated financial statements would be $150,000 - $8,333.33, which is equal to $141,666.67. Since Cooper acquired 70% of Effy, Cooper would recognize 70% of the net book value, which is $99,166.67. However, this value is not among the answer choices. The best option is B, which is the net book value of the machine without any adjustments.