Paper Corporation owns 75 percent of Scissor Company's stock.On July 1,20X8,Paper sold a building to Scissor for $33,000.Paper had purchased this building on January 1,20X6,for $36,000.The building's original eight-year estimated total economic life remains unchanged.Both companies use straight-line depreciation.The building's residual value is considered negligible.
-Based on the information provided,while preparing the 20X8 consolidated income statement,depreciation expense will be:

Question

Quizplus · Accepted Answer

The gain on the sale of the building needs to be eliminated in consolidation. The building's book value at the time of sale was $27,000 ($36,000 cost - $9,000 accumulated depreciation for 2.5 years). The sale price was $33,000, resulting in a $6,000 gain. The depreciation based on the new cost ($33,000) is $4,125 per year, while it should be $3,375 per year based on the original cost ($27,000). The difference of $750 ($4,125 - $3,375) is credited to reduce the excess depreciation recorded by Scissor.

Paper Corporation Owns 75 Percent of Scissor Company's Stock