Azra Company Purchased 100% of the Outstanding Common Shares of Hassan

Multiple Choice

Azra Company purchased 100% of the outstanding common shares of Hassan Company on December 31, 2011 for $170,000. At that date, Hassan had $100,000 of outstanding common stock and retained earnings of $30,000. It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000. The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value. Inventory turns over four times a year. Both companies pay tax at the rate of 40%. What adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 for the fair value increment related to the capital assets?

A) The retained earnings at January 1, 2014 will be increased by $12,000.
B) Amortization expense on the capital assets for 2014 will be increased by $7,500.
C) Amortization expense on the capital assets for 2014 will be increased by $2,500.
D) Retained earnings at the end of 2014 will be increased by $7,500.