Cooper Ltd. acquired 70% of the common shares of Effy Ltd. at January 2, 20X1. At December 31, 20X3, Effy sold a machine to Cooper for $180,000. Effy had purchased the machine a few years earlier for $250,000. At the time of sale to Cooper, the machine had a carrying value of $150,000 and a remaining useful life of six years.
- Both companies do not claim amortization for assets purchased in the second half of the year. For Cooper's December 31, 20X3, consolidated financial statements, what net book value should be shown for the machine?
A)$125,000
B)$150,000
C)$180,000
D)$250,000

Question

Quizplus · Accepted Answer

Since Cooper owns 70% of Effy's common shares, it has significant influence over Effy and must use the equity method of accounting to consolidate Effy's financial statements with its own. 
When Effy sold the machine to Cooper, the transaction was between a parent company and its subsidiary, and no profit or loss can be recognized on this transaction. The net book value (NBV) of the machine should be the carrying value of $150,000, which is the amount that Cooper should report on its consolidated financial statements.