Plesco Corporation acquired 80 percent of Slesco Corporation's voting common stock on January 1,20X7.On January 1,20X8,Plesco received $350,000 from Slesco for equipment Plesco had purchased on January 1,20X5,for $400,000.The equipment is expected to have a 10-year useful life and no salvage value.Both companies depreciate equipment on a straight-line basis.
-Based on the preceding information,in the preparation of consolidation entries related to the equipment transfer for the 20X8 consolidated financial statements,net effect on accumulated depreciation will be:

Question

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The equipment was originally purchased for $400,000 with a 10-year useful life and no salvage value, so it depreciates at $40,000 per year. By the end of 20X7 (3 years of depreciation), accumulated depreciation would be $120,000 ($40,000 x 3 years). When Plesco sells the equipment to Slesco, the book value of the equipment is $280,000 ($400,000 - $120,000). However, Slesco purchased it for $350,000, creating a $70,000 gain on sale for Plesco. Since Plesco owns 80% of Slesco, 80% of the gain ($56,000) is eliminated in consolidation. The consolidated accumulated depreciation increases by the difference between the original book value's accumulated depreciation and the new basis' implied depreciation. The new basis implies $350,000 over a 10-year life, or $35,000 per year. By the end of 20X8, this would be $70,000 in accumulated depreciation on the new basis. The net effect is an increase in accumulated depreciation, considering the elimination of intra-group profit and the adjustment to the new depreciation schedule. The exact calculation involves adjusting for the eliminated gain and the difference in depreciation approaches, leading to an increase of $110,000, which accounts for the consolidated perspective on the equipment's depreciation and the intra-group transaction adjustments.

Plesco Corporation Acquired 80 Percent of Slesco Corporation's Voting Common