Question

Grey Corp owns 100% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $64,192. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $21,413. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 7 years of remaining life and no salvage value. Blue plans to adopt the same depreciation assumptions as Grey. What elimination adjustments with respect to this sale must be made to consolidated net income in 2018 (ignoring income tax effects)?

Answer 1

When the asset was sold
	Grey Corp	Amount			Blue company	Amount
	Sale price of asset	64192			Asset pruchased	64192
Less	Net book value of asset	21413		Less	Depreciation for the year	9170.29	=(64192/7)
	Profit on sale of asset	42779			( assuming 7 years life)
					Net Book Value	55021.71
	From consolidation point of view the reported amount of fixed asset cannot change merely cause asset has been transferred.
	(here Grey Corp has booked profit of 42779, which needs to be eliminated on consolidation)				Here, value of asset is increased by 42779, which needs to be to be decreased, further basis for depreciation will be original net NBV of Grey i.e. 21413 and depreciation thereon with 7 years remaining life = 3059 will be charged Consol P&L and Amount of depreciatoin 9170 which has already been debited in standalone profit and loss account will be added back to profit

	Elemination in respect to asset sale transaction
	Consolidated Net income	XXXXXX
Less:	Profit booked by Grey on sale of asset	-42779
Add:	Depreciation charged on increased book value	9170.2
Less:	Depreciaton to be charged on original net book value	-3059
	Net impact	-36667.8
	(reduce consol net income by this amount)