In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000.S Company's original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000.P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method.This equipment was sold to a third party on January 1, 2014 for $1,440,000.What amount of gain should P Company record on its books in 2014?
A)$60,000.
B)$120,000.
C)$240,000.
D)$360,000.

Question

Quizplus · Accepted Answer

To determine the amount of gain to record on P Company's books in 2014, we need to calculate the equipment's book value at the time of its sale to the third party.

Book value = Original cost - Accumulated depreciation
Book value = $2,000,000 - $1,350,000 (depreciation taken by S Company and P Company over the years)
Book value = $650,000

Since P Company sold the equipment for $1,440,000, the gain on the sale is:

Gain = Sales price - Book value 
Gain = $1,440,000 - $650,000 
Gain = $790,000

However, since the equipment was originally sold by S Company to P Company at a loss ($1,980,000 sales price versus $2,000,000 book value), P Company needs to adjust the gain by the amount of the original intercompany loss.

Intercompany loss = Sales price - Book value 
Intercompany loss = $1,980,000 - $2,000,000 
Intercompany loss = $20,000

Adjusted gain = Gain - Intercompany loss 
Adjusted gain = $790,000 - $20,000 
Adjusted gain = $770,000

Therefore, P Company should record a gain of $770,000 on its books in 2014. However, this gain will also have to be eliminated in the consolidation process since it represents unrealized profit from the intercompany sale.

In January 2008, S Company, an 80% Owned Subsidiary of P