A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells new equipment costing $40,000 to the parent for $85,000. The equipment has a 5-year remaining life at the time of sale, and straight-line depreciation is appropriate. The subsidiary has not recorded any depreciation on the equipment at the time of sale. It is now the end of the current year. The parent and subsidiary report the following balances related to the equipment:
$$\begin{array} { | l | c | c | }
\hline & { \text { Parent } } & \text { Subsidiary } \
\hline \text { Equipment } & \$ 85,000 & \
\hline \text { Accumulated depreciation } & 17,000 & \
\hline \text { Gain on sale of equipment } & & \$ 45,000 \
\hline
\end{array}$$ What should be reported on the consolidated statements for 2020, with respect to this equipment?

Question

A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells new equipment costing $40,000 to the parent for $85,000. The equipment has a 5-year remaining life at the time of sale, and straight-line depreciation is appropriate. The subsidiary has not recorded any depreciation on the equipment at the time of sale. It is now the end of the current year. The parent and subsidiary report the following balances related to the equipment:
$$\begin{array} { | l | c | c | } 
\hline & { \text { Parent } } & \text { Subsidiary } \
\hline \text { Equipment } & \$ 85,000 & \
\hline \text { Accumulated depreciation } & 17,000 & \
\hline \text { Gain on sale of equipment } & & \$ 45,000 \
\hline
\end{array}$$ What should be reported on the consolidated statements for 2020, with respect to this equipment?

Quizplus · Accepted Answer

The correct reporting on the consolidated statements should eliminate intercompany profits and show the book value of the equipment as it was on the subsidiary's books before the sale. The equipment cost $40,000 and has a 5-year life, so one year of depreciation is $8,000 ($40,000 / 5 years). The gain on sale of equipment is eliminated in consolidation because it is an intercompany transaction.

A Parent Owns 80% of Its Subsidiary What Should Be Reported on the Consolidated Statements for 2020