Question

_{Preparing the [I] consolidation entries for sale of depreciable assets—Equity method}

_{Assume that on January 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 depreciates 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 the 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 [l] consolidation entry in 2019 (assuming the subsidiary is still holding the equipment).}

_{e. How long must we continue to make [I] consolidated entries?}

Answer 1

Solution:

Depreciation Value=		Asset Purchase Value-Salvage Value
		Useful life of years
Depreciation Value=		$ 184000-$ 0
		10 years
		$18,400 per year

a. Annual pre-consolidation depreciation expense for the the parent (pre-intercompany sale) : $18,400 per annum

In the Books of Parent Company
Computation of Depreciation
Date	Description	Amount $
01-01-2012	Plant & Machinery A/c	184,000
31-12-2012	Less: Depreciation @ 10%	-18,400
01-01-2013	Book Value of Asset on 2012	165,600
31-12-2013	Less: Depreciation @ 10%	-18,400
01-01-2014	Book Value of Asset on 2013	147,200
31-12-2014	Less: Depreciation @ 10%	-18,400
01-01-2015	Book Value of Asset on 2014	128,800
31-12-2015	Less: Depreciation @ 10%	-18,400
01-01-2016	Book Value of Asset on 2015	110,400

At the time of transfer the value of the Equipment is $110,400

Annual pre-consolidation depreciation expense for the subsidiary (post-intercompany sale) :$16200 per annum

In the Books of Subsidiary Company
Computation of Depreciation
Date	Description	Amount $
01-01-2016	Plant and Machinery	162000
31-12-2016	Less: Depreciation	-27000
01-01-2017	Book Value of Asset on 2016	135000
31-12-2017	Less: Depreciation	-27000
01-01-2018	Book Value of Asset on 2017	108000
31-12-2018	Less: Depreciation	-27000
01-01-2019	Book Value of Asset on 2018	81000
31-12-2019	Less: Depreciation	-27000
01-01-2020	Book Value of Asset on 2019	54000
31-12-2020	Less: Depreciation	-27000
01-01-2021	Book Value of Asset on 2020	27000
31-12-2021	Less: Depreciation	-27000
	Residual Value	0

b. The pre-consolidation Gain on Sale recognized by the parent during 2016.

At the time of transfer the Equipment to subsidiary the value is $110,400.

The gain/loss is :

Date	Description	Amount $
01-01-2016	Sale of Equipment	162,000
01-01-2016	Book Value of Asset on 2015	110,400
01-01-2016	Gain on sale of equipment	51,600

c. Thus, the gain on sale of asset is recognized as $51,600, The journal entry is passed in the books of Parent Company as follows:

In the Books of Parent Company

Journal Entry

Date	Description	Dr. $	Cr.$
01-01-2016	Subsidiary Company A/c                    Dr	162000
01-01-2016	To Gain on Sale of Equipment A/c		51600
01-01-2016	To Equipment A/c		110400
	(Being equipment is sold to Subsidiary Company on profit is recognized and booked)
	After transfer to Subsidiary Company the depreciation is

Consolidated entry in 2016

Date	Description	Dr. $	Cr.$
31-12-2016	Accumulated Depreciation A/c                       Dr.	100600
31-12-2016	Equity Investment A/c		8,600
31-12-2016	Equipment A/c		92000
	Being asset consolidation entry passed in Parent Company

Depreciation Value=		$ 162000-$ 0
		6 years
		$27000 per year

	Accumulated Depreciation A/c
Date	Description	Amount $
31-12-2012	Depreciation Expenses A/c	18400
01-01-2013	Accumulated Depreciation A/c	18400
31-12-2013	Depreciation Expenses A/c	18400
01-01-2014	Accumulated Depreciation A/c	36800
31-12-2014	Depreciation Expenses A/c	18400
01-01-2015	Accumulated Depreciation A/c	55200
31-12-2015	Depreciation Expenses A/c	18400
01-01-2016	Accumulated Depreciation A/c	73600
31-12-2016	Depreciation Expenses A/c	27000
01-01-2017	Accumulated Depreciation A/c	100600
31-12-2017	Depreciation Expenses A/c	27000
01-01-2018	Accumulated Depreciation A/c	127600
31-12-2018	Depreciation Expenses A/c	27000
01-01-2019	Accumulated Depreciation A/c	154600
31-12-2019	Depreciation Expenses A/c	27000
01-01-2020	Accumulated Depreciation A/c	181600
31-12-2020	Depreciation Expenses A/c	27000
01-01-2021	Accumulated Depreciation A/c	208600
31-12-2021	Depreciation Expenses A/c	27000
31-12-2021	Accumulated Depreciation A/c	235600

Journal Entry

Date	Description	Dr. $	Cr.$
31-12-2016	Depreciation Expenses A/c                             Dr.	27000
31-12-2016	To Accumulated Depreciation A/c		27000

d. Consolidation Entry for 2019 (assuming subsidiary company is still holding the asset)

Date	Description	Dr. $	Cr.$
31-12-2019	Accumulated Depreciation A/c                       Dr.	181600
31-12-2019	Equity Investment A/c		127600
31-12-2019	Equipment A/c		54000
	Being asset consolidation entry passed

Date	Description	Dr. $	Cr.$
31-12-2016	Depreciation Expenses A/c                             Dr.	27000
31-12-2016	To Accumulated Depreciation A/c		27000

e. As shown in above working, consolidated entries to be continued till 31-12-2021 when the residual value of the Equipment becomes zero.