During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, Devon 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 at the time of transfer revealed that the building has a fair value of $200,000.

 During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, Devon 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 at the time of transfer revealed that the building has a fair value of $200,000.

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

Multiple Choice

$312,000 Correct

$180,000


$330,000


$150,000

Explanation
$312,000 is correct. The journal entry below reflects the adjustment Devon Company would make as a result of the creation of Regan Company.

Investment in Regan Company Common Stock    312,000    
Accumulated Depreciation, Building    18,000    
Land         100,000
Building         180,000
Cash         50,000
$180,000 is incorrect. This amount is reported by Devon Company as a credit to the building.

$330,000 is incorrect. This amount is the total amount of debits in Devon Company’s journal entry. However, Devon Company must also record $18,000 in accumulated depreciation related to the building. Annual depreciation on the building is $6,000, and accumulated depreciation at the end of year 3 is $18,000. ($180,000 ÷ 30 years = $6,000 per year. $6,000 × 3 years = $18,000.)

$150,000 is incorrect. This amount is the portion of Devon Company’s investment allocated to the par value. However, on Devon Company’s records, the par value and additional paid in capital are reported as a single amount under investments.

 

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