On September 30, 2013 a parent company sold a piece of machinery to its wholly-owned subsidiary for $10,000 which was $5,000 above its carrying amount at that date. The machinery has a remaining useful life of 5 years. What is the pre-tax adjustment required to prepare the December 31, 2013 consolidated financial statements?

Question

Quizplus · Accepted Answer

When a parent company sells a piece of machinery to its wholly-owned subsidiary, any gain or loss on the sale is eliminated in the consolidation process. In this case, the sale resulted in a gain of $5,000 ($10,000 sale price - $5,000 carrying amount). However, this gain is not recognized for consolidated financial statements. Instead, the carrying amount of the machinery should be decreased by $5,000 to reflect its fair value on the subsidiary's books. This adjustment is necessary to ensure that the consolidated financial statements reflect the economic reality of the transaction. Therefore, the correct answer is to decrease machinery-net $5,000 (option B).

On September 30, 2013 a Parent Company Sold a Piece