Question

1. Items (a) through (c) represent transactions between Pero and Sean during 2016. Determine the dollar amount effect of the consolidating adjustment on 2016 consolidated net income. Ignore income tax considerations. Items to be answered: a. On January 3, 2016, Sean sold equipment with an original cost of $30,000 and a carrying value of $21,000 to Pero for $36,000. The equipment had a remaining life of three years and was depreciated using the straight-line method by both companies. b. During 2016, Sean sold merchandise to Pero for $60,000, which included a profit of $20,000. At December 31, 2016, half of this merchandise remained in Pero’s inventory. c. On December 31, 2016, Pero paid $94,000 to purchase 50% of the outstanding bonds issued by Sean. The bonds mature on December 31, 2022, and were originally issued at a discount. The bonds pay interest annually on December 31, and the interest was paid to the prior investor immediately before Pero’s purchase of the bonds.

Answer 1

Calculation of dollar adjustment
Adj	Particulars	Amount
a	Additional carrying value in Sean	15,000
	Useful life	3
	Incremental depreciation charged during the year (charging full depreciation for January)	5,000
	Increase in profits	5,000
b	Reduction of unrealised profit	10,000
c	As no interest was paid immediately before sale of bonds and there is no inter company income/expense on this account reflecting in the profit and loss account, there will be no adjustment required for this transaction
	Net impact, reduction of profit of 5,000 (10,000-5,000)