Question

Preparing the [I] consolidation entries for sale of depreciable assets-Equity method

Assume on Jan. 1, 2016, a parent sells to its wholly owned subsidiary, for a sale price of $162,000, equipment that originally cost $184,000. The parent originally purchased the equipment on January 1, 2012 and depreciated the equipment assuming a 10 year useful life ( straight- line with no salvage value). The subsidiary has adopted the parent's depreciation policy and depreciated the equipment over the remaining useful life of 6 years. The parent uses the equity method to account for its equity Investment.

A.) Compute the annual pre-consolidation depreciation expense for subsidiary (post-intercompany sale) and the parent (pre-intercompany sale)

B.) Compute the pre-consolidation Gain on Sale recognized by the parent during 2016.

C.) Prepare the required [I] consolidation entry in 2016 (assume a full year of depreciation)

D.) Prepare the required [I] consolidation entry in 2019 (assuming the subsidiary is still holding the equipment)

E.) How long must we continue to make the [I} consolidation entries

Answer 1

In the given problem. a Parent sells an asset to its wholly owned subsidiary.

A. Annual pre - consolidation depreciation:

For Parent Company (Pre - Inter-company Sale)

Original Cost of the Equipment = $ 184,000

Life of the asset = 10 years

Depreciation per year = $ 184,000 / 10 years = $ 18,400

For Subsidiary Company (Post- inter-company sale)

Cost of Equipment to Subsidiary Company = $ 162,000

Remaining life of the asset = 6 years

Depreciation per year = $ 162,000 / 6years = $ 27,000

B. Pre-consolidation gain on sale recognized by the Parent:

Original cost of the asset = $ 184,000

Accumulated Depreciation till date of sale = $ 18,400 * 4 years = $ 73,600

Net Value of the asset on the date of sale = $ $ 110,400

Sale value = $ 162,000

Gain on sale = $ 162,000 - $ 110,400 = $ 51,600

C. Consolidation entry in 2016:

Particulars	Debit ($)	Credit ($)
Gain on sale of Asset	51,600
Equipment                                [184,000 - 162,000]	22,000
Accumulated Depreciation   [$18,400 * 4 years]		73,600
(Reversal of Gain realized, depreciation accumulated, at the time of consolidation)
Accumulated Depreciation        [51,600 / 6 years ]	8,600
Depreciation Expense		8,600
(Reversal of additional depreciation expense on gains)

* The gain which has been recorded in the books of the Parent Company, shall be reversed on consolidation.

* Depreciation expense to the subsidiary company post sale is $ 27,000, whereas actual depreciation when gains are reversed will be $ 18,400. The difference i.e. $ 8,600 has been additional depreciation, which needs to be reversed on consolidation.