Linville Ltd. owns 80% of the outstanding shares of Chance Co. On January 2, 20X1, Chance sold a machine to Linville for $270,000. Chance recorded a $45,000 gain on the sale. At the time of the sale, the machine had a remaining useful life of three years. Both companies use the straight-line method of depreciation. What amount should be shown for depreciation expense on Linville's consolidated statement of comprehensive income at December 31, 20X1?
A)$15,000
B)$72,000
C)$75,000
D)$90,000

Question

Quizplus · Accepted Answer

Since Linville owns 80% of Chance, it has significant influence over Chance and the equity method should be used to account for the investment. Under the equity method, Linville's share of Chance's income is added to its own income on the consolidated statement of comprehensive income.

Chance recorded a $45,000 gain on the sale of the machine to Linville. Since Linville owns 80% of Chance, its share of the gain would be $36,000 ($45,000 x 80%). However, this gain will be eliminated on the consolidated statement because it represents a transaction between the two companies.

When the machine was sold, it had a remaining useful life of three years. Using the straight-line method, the annual depreciation expense would be $90,000 ($270,000 / 3 years). Linville owns 80% of the machine, so its share of the depreciation expense would be $72,000 ($90,000 x 80%).

The $72,000 should be included in Linville's consolidated statement of comprehensive income as depreciation expense for the year ended December 31, 20X1.