Question

On January 1st 2020, Hightower Company acquired all of the stock of Striker Company at book value. Hightower uses the initial value method to account for its investment in Striker and Striker doesn't pay any dividends.

On January 1st 2015 Hightower purchased a piece of equipment for $100,000. This equipment is expected to last 10 years. with $7000 salvage; Hightower uses straight line depreciation.

On January 1, 2018, Hightower sold the equipment to Striker for $81,000 receiving a 1 year 12% note with principle and interest due January 1, 2019. Striker believes the equipment will last 7 years and have a $4000 salvage.

On January 1, 2021 Striker sold the equipment to Smith Co. (an outside company) for $57,000 cash.

A) Make Hightower's journal entry when they sold the equipment at to Striker

B) Make Striker's journal entry when they buy the equipment from Hightower

C) Make the necessary worksheet entries for 2018

D) Hightower reported unconsolidated income of $500,000 in 2018 and Striker reported income of $70,000. What is consolidated income?

E) Make the necessary worksheet entries for 2019

F) Make the journal entry Striker makes when it sells the equipment to Smith Co.

G) In 2021 Hightower reported income (unconsolidated) of $625,000 and Striker reported income of $123,000 what is consolidated income

Answer 1

A) Make Hightower's journal entry when they sold the equipment at to Striker

Solution:

The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets)

On January 1st 2015 Hightower purchased a piece of equipment for $100,000. This equipment is expected to last 10 years. with $7000 salvage; Hightower uses straight line depreciation.

Original cost - Scrap Value
Annual Depreciation = -------------------------------------------
Life of the asset

100000 - 7000
= ---------------------------
10

93000
= ------------------ = 9300
10

Therefore annual depreciation is $9300.

1st year (2015) depreciation accumulated = $9300

2nd year (2016) depreciation accumulated = $9300

3rd year (2017) depreciation accumulated = $9300

Total for 3 years = 27900

On January 1, 2018, Hightower sold the equipment to Striker for $81,000 receiving a 1 year 12% note with principle and interest due January 1, 2019.

As on Jan 1, 2018 the book value of the equipment is $ 72100 and the selling price is $81000 so, profit earned is $8900.

Jounal entries :

Date

Particulars

Amount ( in $ )

Amount ( in $ )

1st jan 2015

Equipment A/C ........... Dr. To Bank A/C

100000

100000

31st Dec 2015	Depreciation A/C ...............Dr. To Accumulated Depreciation A/C	9300	9300
31st Dec 2016	Depreciation A/C ...............Dr. To Accumulated Depreciation A/C	9300	9300

31st Dec 2017

Depreciation A/C ...............Dr. To Accumulated Depreciation A/C

9300

9300

1st Jan 2018	Striker A/C ........................Dr. To Equipment A/C	81000	81000
1st Jan 2019	Bank A/C ( principal )....................Dr. Bank A/C ( Interest )......................Dr. To Striker A/C	81000 9720	90720

1st Jan 2019

Equipment A/C.............................Dr. To Profit and Loss A/C

8900

8900