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 December 31, 20X8, Mortar received $390,000 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.

Based on the preceding information, in the preparation of consolidation entries related to the equipment transfer for the 20X9 consolidated financial statements, the net effect on accumulated depreciation will be:

an increase of $160,000.

an increase of $135,000.

a decrease of $135,000.

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible.

Based on the information provided, while preparing the 20X8 consolidated income statement, depreciation expense will be:

debited for $750 in the consolidating entries.

credited for $750 in the consolidating entries.

debited for $1,500 in the consolidating entries.

Explanation / Answer

1. The sale of asset from subsidiary to holding does not have any impact in the accumulated depreciation account of consolidated balance sheet as we would do the necessary elimination of inter company transactions. While consolidating the two, accumulated depreciation will be increased by $135,000

Cost of the asset = 400,000

Life = 10 Years

Depreciation per annum = 400,000/10 = 40,000

For four years (2005 thru 2008) - .Accumulated depreciation would have been $160,000

At the time of sale, the accumulated depreciation was reduced by $160,000

For the year 2009, the depreciation charged by Mortar is 390,000/6 (Cost to Mortar/ Remaining useful life) = 65,000

The excess depreciaiton (65,000-40,000) = 25,000 should be eliminated.

Accumulated depreciation was 160,000 less excess depreciaion = 160,000-25,000 = 135,000 should be eliminated, in other words A/D will go up by 135,000 while consolidating

2. The depreciaion charged by Earth = 33,000/5.5/2 (Cost to Earth/ Remaining useful life /2) = 3,000

Half year depreciation charged by Sky would have bee = 36,000/8/2 = 2,250

Excess depreciation $750 (3,000-2,250) will be eliminated by crediting depreciation expense in consolidating entries

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