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Assume that on January 1, 2009, a parent company acquired a 90% interest in a subsidiary's...

Assume that on January 1, 2009, a parent company acquired a 90% interest in a subsidiary's voting common stock. On the date of acquisition, the fair value of the subsidiary's net assets equaled their reported book values. On January 1, 2011, the subsidiary purchased a building for $486,000. The building has a useful life of 10 years and is depreciated on a straight-line basis with no salvage value. On January 1, 2013, the subsidiary sold the building to the parent for $420,000. The parent estimated that the building had an 8 year remaining useful life and no salvage value. The parent also uses the straight-line method of amortization. The parent's "stand-alone" income (i.e., net income before recording any adjustments related to pre-consolidation investment accounting) is $500,000. The subsidiary's recorded net income is $115,000.

Intercompany sale of depreciable assets
Consolidated net income attributable to the controlling interest:

$578,930

Please show your calculation.

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Expert Solution

Calculation of Book value of the building as on the date of sale:

Cost of Building as at Jan 1, 2011 $         486,000
Less: depreciation for 2011 $           48,600
Less: depreciation for 2012 $           48,600
Book Value as at Jan 1, 2013 $         388,800

Calculation of Increase in book value and the depreciation expense for the building

Particulars Subsidiary Parent Change
Book Value $         388,800 $      420,000 $         31,200
Depreciation for 2013 $           48,600 $         52,500 $           3,900

Calculation of Parents's share of adjusted profit of subsidiary

Subsidiary net income $         115,000
Less: gain on sale of Building $         (31,200)
Add: Reversal of Excess depreiciation for 2013 $              3,900
Adjusted Net Income of Subsidiary $           87,700
Parent's Share (controlling interest) $           78,930

Calculation of Consolidated net income attributable to the controlling interest:

Parent's Net Income $         500,000
Parents Share of subsidiary income $           78,930
Consolidated net income attributable to the controlling interest $         578,930

For any clarification, please comment. Kindly Up Vote

ekkarill92 answered 3 years ago
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