Question

Q1: Assume you have that you have the following information when preparing the consolidated financial statements in 2020 (fiscal year end is 12/31/2020). The consolidated entity includes the parent company and an 80%-owned subsidiary.

1. On January 1, 2018, the subsidiary sold to its parent, for a sale price of $120,000, equipment that originally cost $180,000. The subsidiary originally purchased the equipment on January 1, 2015, and depreciated the equipment assuming a 12-year useful life (straight-line with no salvage value). The parent adopted the subsidiary’s depreciation policy and depreciates the equipment over the remaining useful life. The parent used the full equity method to account for its Equity Investment.

2. During 2020, the subsidiary sold goods to the parent company for $230,000 that cost $180,000. The parent company still owned 30% of the goods at the end of 2020. During 2019, the parent sold goods to the subsidiary for $200,000 that cost $170,000. The subsidiary sold 80% of goods in 2019 and the rest 20% in 2020.

Prepare the related consolidation entries for the year 2020 based on the above information.

Answer 1

a. Caluclation of written down value of asset in the books of subsidiary

Original cost (01-01-2015) =$180000

Estimated useful life = 12 years

Depreciation = 180000/12 = 15000

Depreciation from 01-01-2015 to 31-01-2017 = 15000*3 = 45000

Written down value of the asset = 180000-45000 = 135000

Sale value of the asset = $ 135000

Loss on sale of asset= $135000- $120000 = $ 15000.

The asset will be recorded at the written down value of the subsidiary. Hence it will be recorded at the value of $135000 in the books of parent entity and the depreciation will be provided as per policy of subsidiary. Hence depreciation will be as follows:

Depreciation A/c Dr 15000

To Equipment A/c 15000

2. Journal entry to eliminate the profit is as follows

Consolidate revenue A/c 15000

    To Inventory A/c 15000

Goods lied in stock worth 230000*30% = 69000. unrealised profit in the stock is to be eliminated. Unrealised profit = 69000*50000/230000.