On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for...

On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life.

Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.

What was the amount of the gain or loss on the sale of equipment reported by Republic on its pre-consolidation income statement in 2020?

a. $-0-

b. $ 5,000 gain

c. $20,000 loss

d. $35,000 gain

Solutions

Expert Solution

SOLUTION:

OPTION B IS CORRECT

Amount of the gain or loss on the sale of equipment reported by Republic on its pre consolidation income statement in 2020 =$5000 gain

working:

BOOK VALUE OF EQUIPMENT=ORIGINAL COST-ACCUMULATED DEPRECIATION

=60000-25000 =$35000

LIFE=5 YEARS

ANNUAL DEPRECIATION=BOOK VALUE OF EQUIPMENT/LIFE

=35000/5=$7000

TRANSFERRED DATE APRIL1,2020 OF MACHINE.AS DEPRECIATION IS CALCULATED FOR 9 MONTHS(APRIL TO DECEMBER)=7000*9/12=5250

ANNUAL DEPRECIATION EXPENSE=40000/5 =$8000

GAIN ON SALE OF EQUIPMENT =SALE OF EQUIPMENT-BOOK VALUE OF EQUIPMENT

=40000-35000= $5000gain

TRANSFERRED DATE APRIL1,2020 OF MACHINE.AS DEPRECIATION IS CALCULATED FOR 9 MONTHS(APRIL TO DECEMBER)=8000*9/12= 6000

EXCESS DEPRECIATION RECORDED=TRANSFERRED DATE APRIL1,2020 OF MACHINE.AS DEPRECIATION IS CALCULATED FOR 9 MONTHS(APRIL TO DECEMBER)-TRANSFERRED DATE APRIL1,2020 OF MACHINE.AS DEPRECIATION IS CALCULATED FOR 9 MONTHS(APRIL TO DECEMBER)

=6000-5250 =$750

ekkarill92 answered 1 year ago

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