Question

Grey Corp owns 95% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $64,963. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $25,278. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 2 years of remaining life and no salvage value. Blue plans to adopt the same depreciation assumptions as Grey. What elimination adjustments with respect to this sale must be made to consolidated net income in 2018 (ignoring income tax effects)?

Answer 1

✓Grey corp owns 95% of Blue company. i.e Grey is parent company and Blue is subsidiary company.

✓ on January 01,2017, Grey sold a machine to Blue for $64963. At the time, machine has net book value of $25,278 in Grey books.i.e profit on sale is $39685.

✓Blue plans to adopt Straight line method to depreciate the machine.

✓Remaining useful life of machine is 2 years.

Computation of Unrealised profit on sale of machine in Group point of view for the year ended 2017:-

Method-1

Unrealised profit = Existing carrying amount( - ) for 2017 Deemed carrying in Group point of view

= $64963-($64963 × 1/2) - $25278-($25278 ×1/2).

= $32481.5 - $12639

=$19842.5

Method -2

Unrealised profit for 2017 = Profit on sale of machine (-) Depreciation on profit element.

= $39685 - ($39685 ×1/2)

= $19842.5

Therefore , Eliminate the Unrealised profit of $19482.5 from consolidated net income of 2017.( Adjustment :- i.e unrealised profit add to the Cost of goods sold in consolidated statement of profit or loss )

There is no elimination of Unrealised profit or no any elimination adjustment relating to sale of machine from cosolidated net income of 2018 . Because of there is no machine on 2018, total machine was depreciated.and machine does not have salvage value

Proof:-

Unrealised profit on 2018

= $39685 (-) $39385 × 2/2

= 0

NOTE:- any doubt relating to this answer please comment me. Thank you.