Question

Part A

At the start of the current year, SBC Corp. purchased 25% of Sky Tech Inc. for $52 million. At the time of purchase, the carrying value of Sky Tech's net assets was $86 million. The fair value of Sky Tech's depreciable assets was $10 million in excess of their book value. For this year, Sky Tech reported a net income of $86 million and declared and paid $10 million in dividends.

  

The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

  

None of the above is correct.

$24 million.

$10 million.

$2.5 million.

Part B

At the start of the current year, SBC Corp. purchased 20% of Sky Tech Inc. for $41 million. At the time of purchase, the carrying value of Sky Tech's net assets was $66 million. The fair value of Sky Tech's depreciable assets was $14 million in excess of their book value. For this year, Sky Tech reported a net income of $66 million and declared and paid $14 million in dividends.

The amount of purchased goodwill is:

  

$27 million.

None of the above is correct.

$25 million.

$55 million.

Answer 1

Part A:

D. $2.5 million

The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

= $10 million * 25%

= $2.5 million

Part B:

C. $25 million

The amount of purchased goodwill is:

= $41 million - [20% x ($66 million + $14 million)]

= $41 million - $16 million

= $25 million