Using the same facts as Question 14 but assuming that S will depreciate the asset over its remaining estimated useful life of 8 years.What is the depreciation expense adjustment required on consolidation I year after the intra group sale?
A) CR $400
B) DR $400
C) CR $2,100
D) CR $2,500

Question

Quizplus · Accepted Answer

When S depreciates the asset over its remaining estimated useful life of 8 years, the annual depreciation expense will be $500 ($4,000/8). As S only owned the asset for one year, they will have only taken $500 of depreciation. Therefore, on consolidation, there needs to be an adjustment to increase the depreciation expense by $400 ($500 - $100) to reflect the full 1-year depreciation expense. This adjustment will reduce the cost of sales of P by $400 and increase the profit of S by $400. The adjustment is a credit to eliminate the overstatement of the depreciation expense on S's books, so the correct answer is CR $400.

Using the Same Facts as Question 14 but Assuming That