Question

Grey Corp owns 79% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $68,701. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $26,705. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 6 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 2017 (ignoring income tax effects)? (Note: use a minus sign in your answer to denote a decrease, no sign needed for an increase.)

Answer 1

Elimination of Intragroup Transactions while preparing Consolidated Financial Statements:

In Order to present financial statements for the group in a consolidated form, the effect of transactions between group enterprises should be eliminated. While preparing consolidated Financial statements intragroup balances and resulting unrealized profits should be eliminated in full. Unrealised losses resulting from intragroup transactions should also be eliminated unless costs cannot be recovered.

Liabilities due to one group enterprise by another will be set off against corresponding asset in the other group enterprise’s financial statements. So Unrealized inter-company profits arising from intra group transfers of fixed assets are also eliminated from Consolidated Financial statements.

Solution:

In the given question Grey Corp made Unrealized profit of $ 41996 on sale of Machine to its subsidiary company Blue. So Unrealized profit of -$41996 need to be decreased from Consolidated net income in 2017 and corresponding adjustment also need to be made in Accounts Receivables by decreasing -$41996 from Accounts receivables in Consolidated Statement of Financial Position.