On January 1, 2021, Kapoor Co. sold equipment to its subsidiary, Howard Corp., for $125,000. The equipment had cost $150,000, and the balance in accumulated depreciation was $70,000. The equipment had an estimated remaining useful life of eight years and no salvage value. Both companies use straight-line depreciation. On their separate 2021 income statements, Kapoor and Howard reported depreciation expense of $86,000 and $64,000, respectively. The amount of depreciation expense on the consolidated income statement for 2021 would have been:

Question

Quizplus · Accepted Answer

The consolidated depreciation expense should eliminate the gain on sale and adjust for the original cost and accumulated depreciation. The original cost was $150,000 with $70,000 accumulated depreciation, leaving a net book value of $80,000. The remaining life is 8 years, so the annual depreciation is $10,000. Kapoor's depreciation expense of $86,000 includes the gain, so the correct consolidated expense is $64,000 (Howard's) + $10,000 (adjusted depreciation) = $74,000. However, the question seems to have an error in the options, as none match this calculation.