In January 2014, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. 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, 2017 for $720,000. What amount of gain should P Company record on its books in 2017?
A) $30,000.
B) $60,000.
C) $120,000.
D) $180,000.

Question

Quizplus · Accepted Answer

The original cost of the equipment to S Company was $1,000,000 with accumulated depreciation of $100,000, making the book value $900,000 at the time of sale to P Company. P Company purchased it for $990,000, which means there was an intra-group profit of $90,000. Since P Company owns 80% of S Company, the unrealized profit to be eliminated is 80% of $90,000 = $72,000. The cost to P Company after eliminating unrealized profit is $990,000 - $72,000 = $918,000. Over 9 years, the depreciation per year is $918,000 / 9 = $102,000. By January 1, 2017, three years of depreciation would have been recorded, totaling $306,000. The book value on January 1, 2017, is $918,000 - $306,000 = $612,000. The equipment was sold for $720,000, resulting in a gain of $720,000 - $612,000 = $108,000. However, since the question asks for the gain recorded by P Company, and considering the initial calculation error in unrealized profit adjustment, the correct approach without considering the need to adjust for unrealized profit (as it would have been eliminated over the years through depreciation) directly calculates the gain based on P Company's purchase price and depreciation. The equipment was sold for $720,000, and with the depreciation taken into account, the gain calculation simplifies to the difference between the sale price and the book value at the time of sale. Given the error in the initial explanation regarding unrealized profit adjustment, the correct gain calculation should focus on the sale transaction's specifics in 2017, leading to a reevaluation of the choices provided.

In January 2014, S Company, an 80% Owned Subsidiary of P