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Preparing the [I] consolidation journal entries for sale of depreciable assets - Equity method Assume that...

Preparing the [I] consolidation journal entries for sale of depreciable assets - Equity method
Assume that on January 1, 2011, a wholly owned subsidiary sells to its parent, for a sale price of $120,000, equipment that originally cost $140,000. The subsidiary originally purchased the equipment on January 1, 2007, and depreciated the equipment assuming a 10-year useful life (straight-line with no salvage value). The parent has adopted the subsidiary’s depreciation policy and depreciates the equipment over the remaining useful life of 6 years. The parent uses the full equity method to account for its Equity Investment.

a. Compute the annual depreciation expense for the subsidiary (pre-intercompany sale) and the parent (post-intercompany sale).

Annual depreciation expense-subsidiary Answer
Annual depreciation expense-parent Answer

b. Compute the pre-consolidation Gain on Sale recognized by the subsidiary during 2011.

$Answer

c. Prepare the required [I] consolidation journal entry in 2011 (assume a full year of depreciation).

Consolidation Worksheet
Description Debit Credit
[Igain] AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
Equipment Answer Answer
AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
[Idepr] AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer

d. Now assume that you are preparing the year-end consolidation journal entries for the year ending December 31, 2013. Prepare the required [I] consolidation journal entries during the holding period.

Consolidation Worksheet
Description Debit Credit
[Igain] Investment in subsidiary Answer Answer
AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
[Idepr] AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer
AnswerEquipmentAccumulated depreciation-EquipmentInvestment in subsidiaryDepreciation expenseGain on sale of equipment Answer Answer

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Expert Solution

Answer:

Summary:-

01.01.2007 Purchase of equipment $ 140000
2007-2010 Depreciation on SLM basis for 3 years 140000 / 10 * 4 = $ 40000
01.01.2011 Book Value on the date of sale 140000 - 40000 = $ 100000
Sale value to parent $ 120000
Gain on sale recordd in subsidiary books $ 20000
Depreciation on SLM basis- in parent company books 120000/6 = $ 20000
a)
Annual depreciation expense - subsidiary (Pre - Intercompany Sale) $ 140000/10 = 14000 per year
Annual depreciation expense - subsidiary ( Post-Intercompany Sale) $ 120000/6 = 20000 per year
b)
Gain on sale of equipment as explained in summary $ 20000
c)
Total Gain recogninsed in subsidiary books-gone into consolidation $ 20000
Extra depreciation provided in parent company owning transfer $ 20000 - 14000 = $ 6000
Now in consolidation we have to eliminate inter - company profilr i.e., $ 20000 and this shall be netted with the extra depreciation and entry s follows
Gain on sale of equipment $ 20000
To Equipmnet $ 14000
To Depreciation $ 6000
Depreciation Entry:
Expense (Depreciation) $ 20000
To Equipment (Accumulated Depreciation) $ 20000
Net Depreciation for equipment in consolidation is $ 20000 - $ 6000 $ 14000
d)
Depreciation Entry:
Expense (Depreciation) $ 20000
  To Equipment (Accumulated Depreciation) $ 20000

ekkarill92 answered 2 years ago
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