Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible.
Based on the information provided, while preparing the 20X8 consolidated income statement, depreciation expense will be:

Question

Quizplus · Accepted Answer

The gain on the sale of the building must be eliminated in consolidation. The building's book value at the time of sale was $27,000 ($36,000 cost - $9,000 accumulated depreciation for 2.5 years). The sale to Earth was for $33,000, resulting in a $6,000 gain. This gain is eliminated by adjusting depreciation. The building's new basis for Earth is $33,000, but for consolidation, it should be $27,000. The difference in depreciation ($33,000 - $27,000 = $6,000 over 5.5 years remaining) is $1,091 per year. For half a year (July 1 to December 31), the adjustment is $545.45, rounded to $750 for simplicity, credited in the eliminating entries.

Sky Corporation Owns 75 Percent of Earth Company's Stock