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,while preparing the 20X8 consolidated income statement,depreciation expense will be:

Question

Quizplus · Accepted Answer

The gain on the sale of the building needs to be eliminated in consolidation. The building was sold for $33,000, but its book value was $36,000 - (2.5 years * $4,500/year depreciation) = $24,750. The gain is $33,000 - $24,750 = $8,250. The depreciation difference due to the new basis ($33,000) versus the old basis ($24,750) is $750 per year, which needs to be credited to eliminate the excess depreciation.

Sky Corporation Owns 75 Percent of Earth Company's Stock