Question

In: Accounting

Pam Corporation holds 70 percent ownership of Spray Enterprises. On December 31, 20X6, Spray paid Pam...

Pam Corporation holds 70 percent ownership of Spray Enterprises. On December 31, 20X6, Spray paid Pam $32,500 for a truck that Pam had purchased for $37,500 on January 1, 20X2. The truck was considered to have a 20-year life from January 1, 20X2, and no residual value. Both companies depreciate equipment using the straight-line method. Required:

a. Prepare the worksheet consolidation entry or entries needed on December 31, 20X6, to remove the effects of the intercompany sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Prepare the worksheet consolidation entry or entries needed on December 31, 20X7, to remove the effects of the intercompany sale.

Solutions

Expert Solution

Solution:

Book Value of Asset at the time of Sale = Cost of Asset $37,500 – Accumulated Depreciation 37,500 * 5 / 20

= $37,500 - $9,375

= $28,125

Sale Value of Asset = $32,500

Gain on Sale of Asset = Sale Value $32,500 - Book Value 28,125 = $4,375

Understanding of transactions and events

Spray paid $32,500 to Pam and will record equipment at their books at this value and record depreciation expense on remaining life of equipment for $2,166.67 (32,500 / 15).

Annual Depreciation Expense which Pam was recording on this equipment = $37,500 / 20 = $1,875.

It means Spray will record excess depreciation expense of $292.67 (2167 – 1875) for remaining life of equipment.

For consolidation purpose, we need to remove gain on sale of asset $4,375 on Dec 31, 20X6.

And every year till the remaining life of equipment we need to eliminate the excess depreciation expense for consolidation purpose.

Hence, the journal entry would be as below:

Part a - Consolidation entry needed on December 31, 20X6, to remove the effects of the intercompany sale.

Date

General Journal

Debit

Credit

Dec.31, 20X6

Gain on Sale of Equipment

$4,375

Equipment ($37,500 - $32,500)

$5,000

Accumulated Depreciation

$9,375

(To remove unrealied gain and adjust equipment account to its original historical cost)

Part b – Prepare the worksheet consolidation entry or entries needed on December 31, 20X7, to remove the effects of the intercompany sale.

Date

General Journal

Debit

Credit

Dec.31, 20X7

Accumulated Depreciation

$292.67

Depreciation Expense

$292.67

(To eliminate overstatement of depreciation expense)

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

ekkarill92 answered 2 years ago
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