A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2019. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value, and still holds the equipment at year-end. How will the intercompany eliminations for this transaction affect consolidated income for 2019, assuming the subsidiary still holds the equipment?

Question

Quizplus · Accepted Answer

Depreciation expense is reduced $80,000/5 = $16,000
Gain on sale of $80,000 is eliminated
$80,000 - $16,000 = $64,000 decrease

A Parent Owns 80% of Its Subsidiary