On 1/1/X1 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4 years, which was the remaining life that Peck had at the time of the sale. Neither company had assigned a salvage value to the machine. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements in 20X2?

Question

Quizplus · Accepted Answer

When a depreciable asset is sold in an intercompany transaction, the gain or loss on that sale is deferred, and the asset should appear in the consolidated financial statements as if the intercompany transaction had not occurred. Therefore, the 20X2 gain in the consolidated income statement should be $4,000 as follows:
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On 1/1/X1 Peck Sells a Machine with a $20,000 Book