ON JANUARY 1, 2001 BILBO COMPANY BOUGHT ALL THE OUTSTANDING STOCK OF FROTO COMPA

Question

ON JANUARY 1, 2001 BILBO COMPANY BOUGHT ALL THE OUTSTANDING STOCK OF FROTO COMPANY AT BOOK VALUE. ON JANUARY 1, 2010 BILBO COMPANY PURCHASED A TRUCK FOR $80,000. THIS TRUCK IS EXPECTED TO LAST 9 YEARS AND HAVE A $8000 SALVAGE VALUE. BILBO USES STRAIGHT LINE DEPRECIATION.   ON JANUARY 1, 2014 BILBO SOLD THE TRUCK TO FROTO FOR $75000. FROTO GAVE BILBO A 1 YEAR 10% NOTE WITH PRINCIPLE AND INTEREST TO BE PAID JANUARY 1, 2015. FROTO BELIEVES THE TRUCK WILL LAST 5 YEARS AND HAVE AN $8000 SALVAGE VALUE. FROTO ALSO USES STRAIGHT LINE DEPRECIATION. ON JANUARY 1, 2016 FROTO SOLD THE TRUCK TO MORDOR, AN OUTSIDE COMPANY FOR $55,000. NOTE: BILBO USED THE INITIAL VALUE METHOD TO ACCOUNT FOR ITS INVESTMENT IN FROTO AND FROTO DOES NOT PAY ANY DIVIDENDS

REQUIRED:

A) MAKE THE JOURNAL ENTRY BILBO MADE WHEN IT BOUGHT THE TRUCK

B) DETERMINE THE ANNUAL DEPRECIATION OF THE TRUCK TO BILBO

C) PREPARE THE JOURNAL ENTRY BILBO MADE WHEN IT SOLD THE TRUCK TO FROTO

D) PREPARE THE JOURNAL ENTRY FROTO MADE WHEN IT BOUGHT THE TRUCK

E) DETERMINE THE ANNUAL DEPRECIATION OF THE TRUCK TO FROTO

F) PREPARE ANY WORKSHEET ENTRIES NEEDED IN 2014 CONNECTED WITH THIS TRUCK

G) IN 2014 BILBO REPORTED (UNCONSOLIDATED) INCOME OF $900,000 AND FROTO REPORTED INCOME OF $88,000. WHAT WAS CONSOLIDATED INCOME IN 2014?

H) PREPARE ANY WORKSHEET ENTRIES NEEDED IN 2015 CONNECTED WITH THIS TRUCK

I) IN 2015 BILBO REPORTED (UNCONSOLIDATED) INCOME OF $900,000 AND FROTO REPORTED INCOME OF $88,000. WHAT WAS CONSOLIDATED INCOME IN 2015?

J) PREPARE THE JOURNAL ENTRY FROTO MADE IN 2016 WHEN IT SOLD THE TRUCK TO MORDOR FOR CASH.

K) PREPARE ANY WORKSHEET ENTRIES NEEDED IN 2016

L) IN 2016, BILBO REPORTED (UNCONSOLIDATED) INCOME OF $900,000 AND FROTO REPORETED INCOME IF $90,000 WHAT WAS CONSOLIDTED INCOME IN 2016?

M) WHAT GAIN OR LOSS DO WE SHOW ON THE CONSOLIDATED INCOME STATEMENT IN 2016?

Explanation / Answer

Solution:

(A). Journal Entry

   Truck A/c Dr 80,000

To Cash A/c 80,000

   ( Being Truck Purchased)

(B). Depreciation:

Depreciation = 80,000 - 8,000 / 9 Years

   = 8,000

(C). Journal Entry:

Froto (Cash) A/c Dr 75,000

To Sales A/c 75,000

   ( Being Truck Sold)

(D). Journal Entry

   Truck A/c Dr   

   To Cash A/c

( Being New Truck Purchased )

(E). Depreciation:

Depreciation = 75,000 - 8,000 / 5 Years

= 13,400

(F).

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