Mortar Corporation acquired 80 percent of Granite Corporation\'s voting common s

Question

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis.

Required information

Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

a. Debited for $40,000 in the consolidating entries.

b. Credited for $10,000 in the consolidating entries.

c. Debited for $10,000 in the consolidating entries.

d. Credited for $40,000 in the consolidating entries.

Explanation / Answer

Solution :
Cost to Granit = 350000
Depreciation = 350000/7 = 50000
Depreciation in consolidation entry = 50000 x 80 % = 40000

Hence depreciation expense will be
Debited for $40,000 in the consolidating entries.

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