Question

In: Accounting

Problem2: On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment...

Problem2: On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a historical cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 for 2012 and 2013, respectively.

Prepare the consolidation entries related to the equipment for year 2012 and year 2013 (14pts)

Solutions

Expert Solution

On Jan 01, 2012 following entries were posted:

In the books of Smeder Company for the sale of equipment-

Collins Inc. A/c Dr. 84,000

Accumulated depreciation A/c Dr. 48,000

To, Equipment A/c 120,000

To, Gain on sale of equipment A/c 12,000 (balancing figure)

In the books of Collins Inc. for the purchase of equipment-

Equipment A/c Dr. 84,000

To, Smeder A/c 84,000

The Intercompany consolidation means all these companies are one and hence it is assumed all these independent transactions have not happened. Consolidation entries aim at removing the impact on balance sheet or income statement caused by these intercompany transactions.

In the above problem, profit booked on sale of equipement (12,000) is to be reversed, equipement needs to be restated at the original cost (reduction by 12,000) and additional depreciation expense for 2 years [(84000/6)-(120000/10)]=2000*2 needs to be reversed.

Consolidation entries would be as below:

In the year 2012-

Gain on sale of equipment A/c Dr. 12000

To, Equipment 12000

A/c dep. A/c Dr. 2000

To, Dep 2000

In the year 2013:

A/c dep. A/c Dr. 2000

To, Dep 2000


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