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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