Pluto Corporation owns 70 percent of Saturn Company's stock.On July 1,20X4,Pluto sold a piece of equipment to Saturn for $56,350.Pluto had purchased this equipment on January 1,20X1,for $63,000.The equipment's original 15-year estimated total economic life remains unchanged.Both companies use straight-line depreciation.The equipment's residual value is considered negligible.
-Based on the information provided,the gain on the sale of the equipment eliminated in the consolidated financial statements for 20X4 is

Question

Quizplus · Accepted Answer

The gain on the sale of the equipment for Pluto Corporation is calculated as follows:

Selling price: $56,350
Less: Book value (as of July 1, 20X4)
= Original cost - accumulated depreciation
= $63,000 - ($63,000 / 15 x 3.5)   (depreciation for 3.5 years)
= $63,000 - $14,700
= $48,300

Gain on sale = Selling price - Book value
= $56,350 - $48,300
= $8,050

Since Pluto Corporation owns 70% of Saturn Company's stock, it will eliminate 70% of the gain in the consolidated financial statements:

Eliminated gain = 70% x $8,050
= $5,635

Therefore, the best choice is B, $8,050, because this is the total gain on the sale of the equipment, and the eliminated gain is $5,635.

Pluto Corporation Owns 70 Percent of Saturn Company's Stock