Question

Smart Corporation is a 90%-owned subsidiary of Phan Inc. On January 2, 2016, Smart agreed to lease $400,000 of construction equipment from Phan for $3,000 a month on an operating lease. The equipment has a 10-year life and is being depreciated using the straight-line method.

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Required:

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Prepare the eliminations and adjustments required by the intercompany lease on the Figure 5-8 partial worksheet for December 31, 2016. Key and explain all eliminations and adjustments.

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Figure 5-8
Phan Inc. and Smart Corp.
Consolidated Partial Worksheet
For the Year Ended December 31, 2016
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​	​	​	Eliminations and
​	Trial Balance		Adjustments
​	Phan	Smart	Debit Debit		Credit
Equipment	987,000	40,000	​	​	​	​
Accumulated Depreciation -  Equipment	(212,500)	(8,000)	​	​	​	​
Equipment Under Operating  Lease	400,000	​	​	​	​	​
Accumulated Depreciation -Equipment Under Operating  Lease	(120,000)	​	​	​	​	​
Rent Receivable	3,000	​	​	​	​	​
Rent Payable	​	(3,000)	​	​	​	​
Rental Income	(50,000)	​	​	​	​	​
Rent Expense	​	36,000	​	​	​	​
Depreciation Expense	138,700	2,000	​	​	​	​
​	​	​	​	​	​	​

Answer 1

ANSWER 5.8
PHAN INC. AND SMART CORP.
CONSOLIDATED PARTIAL WORKSHEET
FOR THE YEAR ENDED DECEMBER 31,2016
	Trail balance		Eliminations and adjustments
	Phan	Smart	Debit	Debit	Credit
Equipment	$ 987000	$ 40,000	(OL 2)	$ 400,000
Accumulated Depreciation -Equipment	($212,500)	($8000)			(OL 2)	$ 120,000
Equipment under operating lease	$ 400,000				(OL 2)	$ 400,000
Accumulated Depreciation -Equipment under Operating Lease	($ 120,000)		(OL 2)	$ 120,000
Rent receivable	$ 3,000				(OL 1b )	$ 3,000
Rent payable		($ 3,000)	(OL 1b )	$ 3,000
Rental income	($ 50,000)		(OL 1a )	$ 36,000
Rent expense		$ 36,000			(OL 1a )	$ 36,000
Depreciation Expense	$ 138,700	$ 2,000
				$ 559,000		$ 559,000

(OL 1a) Eliminate intercompany rent expense / revenue of $ 3,000 per month.

(OL 1b) Eliminate one month's accrued rent receivable and payable

(OL 2 ) Reclassify asset under the intercompany operating lease and related accumulated depreciation .