Question

Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2016, Thomson acquired a building with a 10-year life for $410,000. Thomson depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2018, Thomson sold this building to Stayer for $370,400. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial 8, how does this transfer affect the computation of consolidated net income? Multiple Choice O Net income is reduced by $47,700. O Net income is reduced by $38,440. O Net income is reduced by $37,100. o Net income is reduced by $42,400.

Answer 1

Transfer Price	$          370,400
Book Value	$          328,000	=410000-82000
Intra entity gain	$            42,400
Annual Depreciation based on transfer price	$            46,300	=370400/8
Annual Depreciation based on cost	$            41,000	=410000/10
Excess Depreciation	$               5,300
Defer Intra entity gain	$           -42,400
Remove excess depreciation	$               5,300
Net Reduction in consolidated net income	$           -37,100

Answer is c. Net Income reduced by $37100