On 1 July 2023 Bluey Ltd acquired all the shares in Bingo Ltd for $2,005,115. At the date of acquisition all the net assets of Bingo Ltd were at fair value except for equipment.

Carrying amount in the book’s of Bingo Ltd

Fair value

Equipment (cost $600,000)

$580,000

$780,000

The remaining useful life of the Equipment is 10 years.

What consolidation adjusting entries are required on 30 June 2025 regarding depreciation of this revalued equipment?

Question

On 1 July 2023 Bluey Ltd acquired all the shares in Bingo Ltd for $2,005,115. At the date of acquisition all the net assets of Bingo Ltd were at fair value except for equipment.

Carrying amount in the book’s of Bingo Ltd

Fair value

Equipment (cost $600,000)

$580,000

$780,000

The remaining useful life of the Equipment is 10 years.

What consolidation adjusting entries are required on 30 June 2025 regarding depreciation of this revalued equipment?

BlackTom AI · Accepted Answer

Question restatement:
On 1 July 2023 Bluey Ltd acquired all the shares in Bingo Ltd for $2,005,115. Bingo’s equipment has a cost of $600,000 and carrying amount $580,000, but its fair value is $780,000. The remaining useful life of the equipment is 10 years. What consolidation adjusting entries are required on 30 June 2025 regarding depreciation of this revalued equipment?

Options:
- A) Dr Retained earnings $40,000; Cr Accumulated depreciation $40,000
- B) Dr Depreciation expense $40,000; Cr Accumulated depreciation expense $40,000
- C) Dr Depreciation expense $20,000; Cr Accumulated depreciation $20,000
- D) Dr Retained earnings $20,000, Dr Depreciation expense $20,000; Cr Accumulated depreciation $40,000

Option-by-option analysis:
Option A: Dr Retained earnings $40,000; Cr Accumulated depreciation $40,000
- This entry suggests a transfer affecting retained earnings and a credit to accumulated depreciation, which is not how depreciation adjustments are recorded in consolidation. In consolidation, depreciation adjustments relate to recognizing depreciation expense and its corresponding accumulated depreciation, not directly adjusting retained earnings in this way. The structure here is misaligned with standard depreciation journaling.
- Additionally, the magnitude (40,000) does not align with the required depreciation calculation for the period, which depends on the revalued amount and the remaining useful life.

Option B: Dr Depreciation expense $40,000; Cr Accumulated depreciation expense $40,000
- This option presents a debit to depreciation expense (which increases expense) and a credit to a separate account labeled "Accumulated depreciation expense." Typically, the credit would be to Accumulated depreciation (a contra-asset account), not to a separate expense account. The labeling is inconsistent with standard consolidation entries, where the credit side should reduce accumulated depreciation, not create a separate expense account balance.
- Furthermore, the amount 40,000 implies annual depreciation of 40k, which is inconsistent with the revalued amount of 780,000 spread over 10 years (which would be 78,000 per year) and would not match the two-year period ending 30 June 2025.

Option C: Dr Depreciation expense $20,000; Cr Accumulated depreciation $20,000
- This option shows depreciation expense of 20,000 and a standard credit to Accumulated depreciation. However, the amount 20,000 is not aligned with the correct depreciation based on the revalued amount (78,000 per year). Over two years (2023/24 and 2024/25), the total depreciation should be 156,000, not 40,000 or 20,000, so this figure is too small.

Option D: Dr Retained earnings $20,000, Dr Depreciation expense $20,000; Cr Accumulated depreciation $40,000
- This entry combines a depreciation expense debit with a double debit to retained earnings, and a credit to accumulated depreciation that equals the sum of the two debits. This mix is not consistent with standard consolidation practice for depreciation adjustments. The depreciation figure also does not reflect the correct two-year depreciation on the revalued asset (should be 156,000 in total), making the proposed amounts incorrect.

Overall assessment:
- All four options fail to reflect the correct depreciation calculation for the revalued equipment. The proper consolidation entry, given a revalued asset of 780,000 with a remaining useful life of 10 years, would be to recognize depreciation of 78,000 per year. Over two years (from 1 July 2023 to 30 June 2025), the cumulative depreciation would be 156,000. Therefore, the correct consolidation adjusting entry for 30 June 2025 would involve Dr Depreciation expense 156,000; Cr Accumulated depreciation 156,000, aligning the depreciation with the revalued carrying amount and its 10-year life.
- Since none of the provided options match this calculation and the proper accounting treatment, none of the listed alternatives is correct.

Additional notes:
- In consolidation, the depreciation is based on the fair value at the acquisition date (780,000) and the remaining useful life (10 years), regardless of Bingo’s pre-acquisition depreciation. The effect reduces the asset’s book value gradually and increases the period depreciation expense in the consolidated statements.
- If you encounter similar questions, compute the annual depreciation as fair value divided by remaining life, multiply by the number of years since acquisition, and ensure the debit is to Depreciation expense and the credit to Accumulated depreciation, with the correct amounts and proper labeling.

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