Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 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 equipment 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, net effect on accumulated depreciation will be:

Question

Quizplus · Accepted Answer

The equipment was originally purchased for $400,000 and had been depreciated for 3 years by Mortar before being sold to Granite. The accumulated depreciation at the time of sale was $120,000 ($400,000 / 10 years * 3 years). Granite purchased it for $350,000 and will depreciate it over the remaining 7 years, resulting in annual depreciation of $50,000. For 20X9, the accumulated depreciation should reflect the original depreciation schedule, which would have been $40,000 per year. The difference in depreciation for 20X8 and 20X9 is $10,000 per year, resulting in a total increase of $20,000 in accumulated depreciation for these two years. Thus, the net effect on accumulated depreciation is an increase of $100,000 ($120,000 - $20,000).

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