Question

In January of 2019, a wholly owned subsidiary sold Equipment to the parent for a cash price of $122,500. The subsidiary had acquired the equipment at a cost of $140,000 and the estimated useful life when purchased was 10 years, and there was no salvage value. The subsidiary had depreciated the equipment for 4 years at the time of sale using the straight line method. The parent retained the depreciation policy of the subsidiary and depreciated the equipment over its remaining 6-year useful life.

Prepare the following journal entries:

a) the journal entry the subsidiary made to record the sale of the equipment to the parent

b) the journal entry that the parent made to record the purchase

c) the eliminating [I] entries for the year of sale relating to the gain on sale of equipment and the depreciation

a. Subsidiary:

DR: Cash

DR: ?

CR: ?

CR: Property, Plant and Equipment

b. Parent

DR: ?

CR: ?

c. [I] Gain

DR: ?

DR: Property, Plant and Equipment

CR: ?

[I] Depreciation

DR: ?

CR:?

Answer 1

a) the journal entry the subsidiary made to record the sale of the equipment to the parent

Trn.	Account Titles	Debit	Credit
a)	Cash	$122,500
	Accumulated depreciation [($140000/10 years) × 4 years]	$56,000
	Equipment		$140,000
	Gain on sale (b/f)		$38,500
	(To record the sale of equipment)

__________________________________________________________________

b) the journal entry that the parent made to record the purchase

Trn.	Account Titles	Debit	Credit
b)	Gain on sale	$38,500
	Equipment	$17,500
	Accumulated depreciation		$56,000

______________________________________________________________

c)

Trn.	Account Titles	Debit	Credit
c)	Accumulated depreciation	$6,417
	Depreciation Expense [$20,417 - $14,000]		$6,417
	[$122500/6 = $20417]
	[$140000/10 = $14000]
	(To eliminate the excess depreciation expense recorded by subsidiary, and to adjust accumulated depreciation)