1)Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold
ID: 2458821 • Letter: 1
Question
1)Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold equipment to Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage’s recorded depreciation expense on the equipment for 2017 will be reduced by:a) 10% of the gain on sale. b) 12 1/2% of the gain on sale. c) 80% of the gain on sale. d) 100% of the gain on sale. 2)Petunia Corporation owns 100% of Stone Company’s common stock. On January 1, 2017, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of: a) 2017, ($90,000); 2018, $0 b) 2017, ($90,000); 2018, $9,000 c) 2017, ($81,000); 2018, $0 d) 2017, ($81,000); 2018, $9,000 Please show all the work so I can learn from that....thanks 1)Petunia Company owns 100% of Sage Corporation. On January 1, 2017 Petunia sold equipment to Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage’s recorded depreciation expense on the equipment for 2017 will be reduced by:
a) 10% of the gain on sale. b) 12 1/2% of the gain on sale. c) 80% of the gain on sale. d) 100% of the gain on sale. 2)Petunia Corporation owns 100% of Stone Company’s common stock. On January 1, 2017, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of: a) 2017, ($90,000); 2018, $0 b) 2017, ($90,000); 2018, $9,000 c) 2017, ($81,000); 2018, $0 d) 2017, ($81,000); 2018, $9,000 Please show all the work so I can learn from that....thanks
a) 10% of the gain on sale. b) 12 1/2% of the gain on sale. c) 80% of the gain on sale. d) 100% of the gain on sale. 2)Petunia Corporation owns 100% of Stone Company’s common stock. On January 1, 2017, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated income would be an increase (decrease) of: a) 2017, ($90,000); 2018, $0 b) 2017, ($90,000); 2018, $9,000 c) 2017, ($81,000); 2018, $0 d) 2017, ($81,000); 2018, $9,000 Please show all the work so I can learn from that....thanks
Explanation / Answer
1) Answer: Option - b) 12.5 % of the gain on sale.
Petunia had held the asset for 4 years before the transfer and has depreciated at 10% SLM. The BV at the time would be 60% of the original cost.
The transfer is at a gain.
For the sake of better understanding, the transfer price can be split into two--
60% of the original cost to Petunia.
Gain on the above value
Both these components would be depreciated at 100/8 = 12.5% by Sage after transfer.
As 12.5% of the 60% of the original cost to Petunia, would mean extending the life of the asset from 10 to 12 (4+8),
the rate of 12.5% is OK, as the BV has to be divided by the extended life in years.
For the gain, which is to be eliminated on consolidation, no depreciation is allowable on consolidation. Hence, Dpreciation of Sage is to be reduced by 12.5% of the gain.
2) The answer is Option - (d) 2017 ($81000), 2018 $ 9000
For 2017, the profit on sale of the equipment of $90000 should be reduced and additional depreciation of 10% on 90000 amounting to 9000 should be reduced from the depreciation expense--ie income to be reduced by 90000 and expenditure to be reduced by 9000. Net effect is reduction of $81000 in consolidated income.
For 2018, the excess depreciation of 9000 is to be reduced from expense, ie: consolidated income should be increased by $9000.
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