Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis.
Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, the net effect on accumulated depreciation will be:

Question

Quizplus · Accepted Answer

The equipment was originally purchased for $400,000 and depreciated over 4 years (20X5 to 20X8) at $40,000 per year, resulting in accumulated depreciation of $160,000. When sold to Granite, the equipment's book value was $240,000 ($400,000 - $160,000). Granite will depreciate the equipment over its remaining 6-year life, resulting in $65,000 of depreciation for 20X9. The elimination entry will adjust accumulated depreciation to reflect the original depreciation schedule, resulting in an increase of $135,000 ($200,000 - $65,000).

Mortar Corporation Acquired 80 Percent of Granite Corporation's Voting Common