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Padre holds 100 percent of the outstanding shares of Sonora. On January 1, 2016, Padre transferred...

Padre holds 100 percent of the outstanding shares of Sonora. On January 1, 2016, Padre transferred equipment to Sonora for $126,000. The equipment had cost $154,000 originally but had a $64,000 book value and five-year remaining life at the date of transfer. Depreciation expense is computed according to the straight-line method with no salvage value. Consolidated financial statements for 2018 currently are being prepared. What worksheet entries are needed in connection with the consolidation of this asset? Assume that the parent applies the partial equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Prepare Entry *TA to adjust to the 1/1/2018 balances for the consolidated entity.

Prepare Entry ED to remove the excess current year depreciation to reflect the historical depreciation instead of the transfer price.

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Expert Solution

On Jan 01 2016, Padre holding 100% of outstanding shares of Sonora transfered equipment for 126000. Equipment original cost is 154000 and had a book value of 64000 with 5 years remaining life.

In 2016 Padre will record profit as calculated here. Gain on transfer= 126000-64000=62000. Depreciation per year will be 126000/5=25200.

Company in its seperate books will maintain equipment record as follows

In 2016 Equipment sale price=126000

Profit on transfer=62000

Depreciation and accumulated depreciation will be 25200

In 2017 Depreciation will be 25200 and accumulted depreciation will be 50400. Profit and loss of transfer impact on earning in Income statement is 62000 profit with 50400 depreciation effect.

In 2018 Depreciation will be 25200 and accumulated depreciation will be 25200+25200+25200=75600

Consolidated statements will reflect following

Assuming it will record based on historical cost method accounting, The Original cost of equipment is 154000 and had a book value of 64000 which means the accuilated depreciation is 90000.

Depreciation for 2016 = 64000/5=12800

Accumulated depreciation=90000+12800=102800

In 2017 Depreciation will be 12800 and accumulated depreciation will be 102800+12800=115600

In 2018 Depreciation will be 12800 and accumulated depreciation will be 115600+12800=128400.


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