Sky Corporation owns 75 percent of Earth Company's stock.On July 1,20X8,Sky sold a building to Earth for $33,000.Sky 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 equipment'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 Sky Corporation owns 75 percent of Earth Company's stock, the two companies must prepare consolidated financial statements. This involves eliminating any intercompany transactions, such as the sale of the building from Sky to Earth.

To calculate the depreciation expense for the building, we need to first find the depreciable base. This is the original cost of $36,000 minus the estimated residual value, which is considered negligible, divided by the estimated economic life of 8 years:

($36,000 - $0) / 8 = $4,500

Since the building was sold to Earth halfway through the year, Sky would have used up half of the depreciable base in the first half of 20X8, leaving $2,250 ($4,500 / 2) for the remaining half of the year.

Therefore, the depreciation expense recorded by Sky for the building in 20X8 would be $2,250. When preparing the consolidated income statement for 20X9, this depreciation expense would need to be eliminated from the combined total, since it represents depreciation on an asset that is no longer owned by Sky.

Since Sky owns 75 percent of Earth, 75 percent of the $2,250 depreciation expense would need to be eliminated, leaving $562.50 ($2,250 x 0.75). However, since the expense is being eliminated, it would need to be credited in the eliminating entries, not debited. Therefore, the answer is choice C, credited for $1500 in the eliminating entries.

Sky Corporation Owns 75 Percent of Earth Company's Stock