Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1,2007.On January 1,2008,Mortar received $350,000 from Granite for a equipment Mortar had purchased on January 1,2005,for $400,000.The equipment is expected to have a 10-year useful life and no salvage value.Both companies depreciate equipments on a straight-line basis.
-Based on the preceding information,in the preparation of the 2008 consolidated balance sheet,accumulated depreciation will be:

Question

Quizplus · Accepted Answer

Since Mortar acquired 80% of Granite's voting common stock, it must prepare consolidated financial statements. In order to do so, Mortar must eliminate any intercompany transactions between itself and Granite. 
In this case, Mortar received $350,000 from Granite, which means that the equipment was transferred from Mortar to Granite. As a result, Mortar must remove the equipment from its own books and record the $350,000 as a gain. Because the equipment was purchased for $400,000 and has a 10-year useful life with no salvage value, the amount of accumulated depreciation for one year would be $40,000 ($400,000 ÷ 10 years). Therefore, accumulated depreciation for the equipment as of January 1, 2008, would be $40,000. 
Since Mortar transferred the equipment to Granite, they must remove the $40,000 depreciation from Mortar's books and credit it to the asset account. Therefore, Accumulated Depreciation will be credited for $40,000 for 2008. 
However, since Mortar received $350,000 from Granite, they will need to recognize the gain on the sale of equipment. The gain will be the difference between the sale price of $350,000 and the equipment's book value of ($400,000 - $40,000) = $360,000. Therefore, Mortar must record a gain of $350,000 - $360,000 = -$10,000. 
To eliminate the gain, Mortar will debit the gain account and credit Investment in Granite Corporation to remove the intercompany transaction. Therefore, accumulated depreciation will be credited for $110,000 ($40,000 + $70,000 (the gain debited)) in the eliminating entries.

Mortar Corporation Acquired 80 Percent of Granite Corporation's Voting Common