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,in the preparation of the 20X9 consolidated income statement,depreciation expense will be:

Question

Quizplus · Accepted Answer

Since Paper owns 75% of Scissor's stock, it has a controlling interest in Scissor and must use the equity method to account for its investment. When Paper sold the building to Scissor, the building's carrying value on Paper's books was $27,000 ($36,000 cost - $9,000 accumulated depreciation), but Scissor records it at the fair value of $33,000, resulting in a gain for Scissor of $6,000. In the consolidation process, the gain is eliminated, and the building's carrying value on the consolidated balance sheet is $27,000, with $6,000 recorded as a minority interest on the balance sheet. Both companies use straight-line depreciation, and since the building has an eight-year estimated useful life, the annual depreciation expense is $3,000 ($27,000 ÷ 8 years). Therefore, in the consolidating entries, the depreciation expense for the building is credited for the portion that belongs to the minority interest, which is 25% of $3,000 or $750. Thus, the answer is C, credited for $1,500 in the consolidating entries.

Paper Corporation Owns 75 Percent of Scissor Company's Stock