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In: Accounting

Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at...

Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company. On January 1, 20X4, Fred paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Winner purchased the equipment from Fred on December 31, 20X6, for $140,000. Winner sold land it had purchased for $75,000 on February 18, 20X4, to Fred for $60,000 on October 10, 20X7. Required: Prepare the elimination entries for 20X8 related to the sale of depreciable assets and land.

Correct Answer:

DRAccumulated Depreciation 5,000

CRDepreciation Expense 5,000

DRInvestment in Summit 30,000

DRBuildings and Equipment 10,000

CRAccumulated Depreciation 40,000

For building,

If we are looking at 2008, why investment 30, bldg 10 and A/d 40? Did we not record an entry in 2007? Should it not be Investment 25K, Equipment 10K, and A/D 35K? It is posted as the correct solution, but can someone explain why?

Solutions

Expert Solution

Equipment Book Value 150000
Accumulated Depreciation 30000
Sold to Winner at 140000
Profit on sale of equipment 20000
In the books of FRED
Cash   debit 140000
Accumulated depreciation 30000
Equipment credit 150000
Gain on sale of equipment credit 20000
In the books of Winnner
Equipment debit 140000
Cash credit 140000
The subsidiary will record depreciation expense each year at $17,500 ($140,000/8 years
The gain on sale of $20,000 must be eliminated along with the difference in depreciation of $2,500 ($17,500 - $15,000). The $15,000 in depreciation is based on a $120,000 carrying value.
Gain on sale of equipment debit 20000
Accumulated depreciation debit 2500
Depreciation expense credit 2500
Equipment credit 20000
The depreciation adjustment will be required at each year-end over the life of the asset
In subsequent years, the debit to gain on sale instead will be to retained earnings for an amount that is reduced by the accumulated excess amortization.
For Land
In the books of FRED
Land Account Debit 60000
Cash credit 60000
In the books of Winner
Cash Debit 60000
loss on sale of building debit 15000
Building credit 75000
The Loss on sale of $15,000 must be eliminated
Building debit 15000
loss on sale of building credit 15000

ekkarill92 answered 9 months ago
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