Question

Preparing the [I] consolidation entries for sale of depreciable assets—Equity method Assume that on January 1, 2016, a parent sells to its wholly owned subsidiary, for a sale price of $162,000, equipment that originally cost $184,000. The parent originally purchased the equipment on January 1, 2012, and depreciated the equipment assuming a 10-year useful life (straight-line with no salvage value). The subsidiary has adopted the parent’s depreciation policy and depreciates the equipment over the remaining useful life of 6 years. The parent uses the equity method to account for its Equity Investment. a. Compute the annual pre-consolidation depreciation expense for the subsidiary (postintercompany sale) and the parent (pre-intercompany sale). Subsidiary - depreciation $Answer Parent - depreciation $Answer b. Compute the pre-consolidation Gain on Sale recognized by the parent during 2016. $Answer c. Prepare the required [I] consolidation entry in 2016 (assume a full year of depreciation). Description Debit Credit [lgain] Equipment [ldep] d. Prepare the required [l] consolidation entry in 2019 (assuming the subsidiary is still holding the equipment). Description Debit Credit [lgain] Equipment [ldep]

Answer 1

Answer :-

Summary
01.01.2012	Purchase of equipment		$ 184,000
2010-2014	Depreciation on SLM basis for 3 years		184,000/10*4=$73,600
01.01.2014	Book Value on the date of sale		$184,000-$73,600=$ 110,400
	Sale value to parent		$162,000
	Gain on sale recorded in subsidiary books		$ 51,600
	Depreciation on SLM basis-In parent company books		162,000/6=$ 27,000
a
Annual depreciation expense-subsidiary $ 184,000 /10=$ 18,400 per year (Pre-Intercompany sale)
Annual depreciation expense-subsidiary $ 162,000/6=$ 27,000 per year (Post-Intercompany sale)
b
Gain on sale of equipmnet as explained in summary $ $51,600.
c
Total gain recognised in subsidiary books-gone into consolidation       $ 51,600
Extra depreciation provided in parent company owing transfer	$ 27,000 -18,400 =$ $8,600
Now in consolidation we have to eliminate inter-company profiti.e $ 51,600 and this shall be netted with extra depreciation and entry as follows

S.No.	Account and title	Debit	Credit
1)	Gain on sale of equipment	$51,600
	To Equipment		$43,000
	To Depreciation		$8,600
2)	Depreciation Expense	$27,000
	Accumulated depreciation equipment		$27,000
	(Depreciation Entry)

Net Depreciation for equipment in Cosolidation is $27,000 - 8,600 = $18,400

d)

2-Jan	Depreciation Expense	Debit	Credit
	Accumulated depreciation equipment	$27,000
	(Depreciation Entry)		$27,000