Question

At the beginning of 2019, a parent sells equipment with a book value of $400,000 to its subsidiary for $500,000. At the time of the sale, the equipment had a remaining life of 5 years, straight-line. The subsidiary sold the equipment to an outside buyer for $470,000 at the end of 2021 (3 years later).

The consolidation eliminating entry needed to consolidate the accounts of the parent and subsidiary at the end of 2021 has what effect?

	A.	Increase investment in subsidiary by $60,000
	B.	Increase gain on sale by $60,000
	C.	Reduce equipment (net) by $80,000
	D.	Decrease depreciation expense by $40,000

Answer 1

Answer :

The correct answer is

(B). Increase gain on sale by $60000

Explanation :

When holding company sold the asset to subsidairy company at a gain of $100000,but that gain used to get eliminated for consolidation purposes and was depreciated every year as excess cost was taken over by subsidiary. So after two year gain on $60000 (100000 - (20000*2)). Will be added to consolidated statement as now asset has been sold externally by subsidiary to another, so gain of $60000 will also be recognized.