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Jay Inc owns 80% of Tesla Inc and uses the cost method to account for its investment.The 2010 income statements of both companies are shown below.
Jay Tesla
Gross Profit $100,000 $50,000
Miscellaneous Expenses $30,000 $20,000
Depreciation Expense $20,000 $15,000
Income Tax Expense $20,000 $ 6,000
Net Income $30,000 $9,000
On January 1,2010,Tesla sold equipment to Jay at a profit of $3,000 Jay had been depreciating this equipment over a 20 year period.Both companies are subject to an effective tax rate of 40%.
-The amount of depreciation expense appearing on Jay's 2010 Consolidated Income Statement would be:

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The following information pertains to question 
Jay Inc owns 80% of Tesla Inc and uses the cost method to account for its investment.The 2010 income statements of both companies are shown below.
Jay Tesla
Gross Profit $100,000 $50,000
Miscellaneous Expenses $30,000 $20,000
Depreciation Expense $20,000 $15,000
Income Tax Expense $20,000 $ 6,000
Net Income $30,000 $9,000
On January 1,2010,Tesla sold equipment to Jay at a profit of $3,000 Jay had been depreciating this equipment over a 20 year period.Both companies are subject to an effective tax rate of 40%.
-The amount of depreciation expense appearing on Jay's 2010 Consolidated Income Statement would be:

Quizplus · Accepted Answer

The depreciation expense on Jay's consolidated income statement includes Jay's own depreciation ($20,000) plus Tesla's depreciation ($15,000). The intercompany profit on the equipment sale ($3,000) must be eliminated, and the tax effect is considered. The profit is spread over 20 years, so $150 ($3,000/20) is the annual adjustment. After tax, this is $90 ($150 * (1 - 0.40)). Therefore, the total depreciation is $35,000 ($20,000 + $15,000 - $90).

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