Question

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Downstream Intercompany Equipment Transactions On July 1, 2015, Pearl Industries sold administrative equipment with a book...

Downstream Intercompany Equipment Transactions

On July 1, 2015, Pearl Industries sold administrative equipment with a book value of $360,000 to its subsidiary, Shiek Shoes, for $420,000. At the date of sale, the equipment had a remaining life of five years. It is being straight-line depreciated on Shiek’s books. It is now December 31, 2017, the end of the accounting year, and you are preparing the working paper to consolidate the trial balances of Pearl and Shiek. Shiek still owns the equipment.

Required

(a) Prepare the necessary consolidation eliminating entries at December 31, 2017.

Consolidation Journal
Description	Debit	Credit
Answer

	Answer	Answer
Answer

	Answer	Answer
To eliminate unconfirmed gain on intercompany transfer of equipment.
Answer

	Answer	Answer
Answer

	Answer	Answer
To eliminate excess depreciation expense.

(b) It is now December 31, 2018. Prepare the required eliminating entries for this intercompany equipment transaction for the December 31, 2018, consolidation working paper.

Consolidation Journal
Description	Debit	Credit
Answer

	Answer	Answer
Answer

	Answer	Answer
To eliminate unconfirmed gain on intercompany transfer of equipment.
Answer

	Answer	Answer
Answer

	Answer	Answer
To eliminate excess depreciation expense.

What is the consolidated gain on the sale of equipment? $Answer

What is the gain reported by Shiek? $Answer

*Really I just need the answers to part c here along with explanations. Thanks!

Solutions

Expert Solution

SOLUTION OF C.. AS GIVEN ABOVE, WE WILL FIRST CALCULATE THE BOOK VALUE AS ON 31/12/2017 OF EQUIPEMENT IN THE BOOKS OF SHIEK.

	2015	2016	2017	2018
OPENING BALANCE	$4,20,000	$3,36,000	$2,52,000	$1,68,000
LESS- DEPRICIATION	$84,000	$84,000	$84,000	$84,000
CLOSING BALANCE	$3,36,000	$2,52,000	$1,68,000	$84,000

TO CALCULATE THE CONSOLIDATED GAIN, WE WOULD FIRST FIND GAIN AS PER SHIEK'S BOOK

VALUE OF EQUIPENT IN BOOKS AS ON 31/12/2018 = $84,000

LESS- SALE VALUE = $3,00,000

(PROFIT)/ LOSS =$2,16,000.

"GAIN REPORTED BY SHIEK WILL BE $2,16,000"

AS THE BOOKS OF ACCOUNT ARE CONSOLIDATED THE GAIN ARISED IN BOOKS OF PEARL INDUSTRIES WILL HAVE TO BE ELIMINATED FROM THE GAIN ARISED BY SHEIK ON SALE OF EQUIPEMENT.

THE GAIN ARISED BY PEARL INDUSTRY IS BOOK VALUE LESS VALUE AT WHICH SOLD TO SHIEK

=$3,60,000 - $4,20,000 = $60,000.

AS THE VALUE OF EQUIPEMENT IN SHIEK LIMITED IS OVER-RATED BECAUSE $60,000 IS UNREALISED GAIN IN CONSOLIDATED GAIN. THE AMOUNT OF GAIN ARISED BY SHIEK WILL BE REDUCED BY UNREALISED GAIN BY PEARL INDUSTRIES

"THEREFORE AMOUNT OF CONSOLIDATED GAIN WILL BE

= $2,16,000 - $60,000

= $1,56,000"

ekkarill92 answered 1 year ago

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