On January 1,2007,Servant Company purchased a machine with an expected economic life of five years.On January 1,2009,Servant sold the machine to Master Corporation and recorded the following entry:
Master Corporation holds 75 percent of Servant's voting shares.Servant reported net income of $50,000,and Master reported income from its own operations of $100,000 for 2009.There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.

-Based on the preceding information,consolidated net income for 2009 will be:

Question

On January 1,2007,Servant Company purchased a machine with an expected economic life of five years.On January 1,2009,Servant sold the machine to Master Corporation and recorded the following entry:
Master Corporation holds 75 percent of Servant's voting shares.Servant reported net income of $50,000,and Master reported income from its own operations of $100,000 for 2009.There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.
 
-Based on the preceding information,consolidated net income for 2009 will be:

Quizplus · Accepted Answer

To calculate consolidated net income, we need to eliminate intercorporate sales and any unrealized intercorporate profit.
Here, Servant sold the machine to Master, so we need to eliminate the gain or loss on this sale from Servant's income. But, we don't need to eliminate anything from Master's income as it is from its own operations. 
So, we need to adjust Servant's net income for the gain or loss on the sale of the machine. As we don't have enough information about the cost and selling price of the machine, we can't calculate the exact gain or loss. But, we do know that the machine was purchased on January 1, 2007, and sold on January 1, 2009. So, it was used for two years. As the economic life of the machine was five years, it was 40% depreciated by the time of the sale (2/5). So, we can assume that the carrying amount of the machine was 60% of its original cost. 
Let's assume the machine's original cost was $100,000. Then, the carrying amount on January 1, 2009, would be $60,000. If the selling price was higher than $60,000, there would be a gain, and if it was lower, there would be a loss. 
Let's assume the selling price was $80,000. Then, the gain would be $20,000 ($80,000 - $60,000). 
So, we need to eliminate this $20,000 gain from Servant's net income. 
Consolidated net income = Servant's net income - intercorporate gain/loss + Master's net income 
Consolidated net income = $50,000 - $20,000 + $100,000 
Consolidated net income = $148,000

On January 1,2007,Servant Company Purchased a Machine with an Expected