Help Save & Exit Sul Check my Dunn Corporation owns 100 percent of Grey Corporat

Question

Help Save & Exit Sul Check my Dunn Corporation owns 100 percent of Grey Corporation's common stock. On January 2, 2017 Dunn sold to Grey $49,500 of machinery with a carrying amount of $39,000. Grey is depreciating the acquired machinery over a five-year remaining life by the straight-ine method. The net adjustments to compute 2017 and 2018 consolidated net income would be an increase (decrease) of Multiple Choice 2017 (10,500) 2018 2017 2018 $ (10,500) $2,100 2017 $(8,400) 2018 $2,100 2018 2017 S(8,400)

Explanation / Answer

The third option is correct i.e in 2017 net income would be decreased by ($8400) and 2018 net income has to be increased by $2100. When computing the consolidated income the main aim is to readjust the values of the account only and not considering the intercompany transaction. In 2017, the gain on the sale of the machinery ($49,500 – $39,000 = $10,500) should be removed, because the consolidated company does not consider any gain. Also in 2017, depreciation expense must be deducted as the Grey corporation calculated depreciation on a cost of $49,500 instead of $39,000. Additional depreciation of $2,100 [($49,500 – $39,000) / 5] must be deducted. Therefore, 2017 consolidated income must be decreased by $8,400 ($10,500 – $2,100) from the net income. 2018 consolidated income should be adjusted for the additional depreciation of the machinery acquired, therefore it is to be increased by $2,100.

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