Question

Padre holds 100 percent of the outstanding shares of Sonora. On January 1, 2016, Padre transferred equipment to Sonora for $95,000. The equipment had cost of $130,000 originally but had a $50,000 book value and five-year remaining life at the date of transfer. Depreciation expense is computed according to the straight-line method with no salvage value.

Consolidated financial statements for 2018 currently are being prepared. What worksheet entries are needed in connection with the consolidation of this asset? Assume that the parent applies the partial equity method.

Answer 1

	Date	Accounts Titles & Explanation	Debit	Credit
1		Retained Earnings	$27,000
		Equipment	$35,000
		Accumulated Depreciation		$62,000
2		Accumulated Depreciation	$9,000
		Depreciation Expesnes		$9,000
	Working
	12/31/2016	Equipment	$95,000
		Gain on transfer	$45,000
		($95,000 - $50,000)
		Depreciation Expenses	$19,000
		($95,000/5 years)
		Acc. Dep	$19,000
	12/31/2017
		Depreciation Expenses	$19,000
		($95,000/5 years)
		Acc. Dep	$38,000	(2 years)
	12/31/2018	Effect on retained earnings, 1/1/15 = $7,000 credit balance (gain less two years depreciation)
		Depreciation Expenses	$19,000
		($95,000/5 years)
		Acc. Dep	$57,000	(3 years)
	Consolidated reporting based on historical cost
	12/31/2016	Equipment	$13,000
		Depreciation Expenses	$10,000
		($50,000/5 years)
		Acc. Dep ($80,000+ $10,000)	$90,000
	12/31/2017
		Depreciation Expenses	$10,000
		($50,000/5 years)
		Acc. Dep ($90,000+ $10,000)	$100,000
	12/31/2018	Effect on retained earnings, 1/1/15 = ($20,000) (two years depreciation)
		Depreciation Expenses	$10,000
		($95,000/5 years)
		Acc. Dep ($100,000+ $10,000)	$110,000
	Equipment ($130,000 – $95,000) = $35,000
	Accumulated depreciation ($100,000 – $38,000) = $62,000