Question

On April 1, 2016, Mumford Company sold equipment to its wholly owned subsidiary, Stapp Corporation, for $306,000. At the time of the transfer, the asset had an original cost (to Mumford) of $350,000 and accumulated depreciation of $110,000. The equipment has a ten-year estimated remaining life.

Stapp reported net income of $500,000, $580,000 and $620,000 in 2016, 2017, and 2018, respectively. Mumford received dividends from Stapp of $180,000, $210,000 and $240,000 for 2016, 2017, and 2018, respectively.

Assume Mumford uses the equity method to account for its investment in Stapp. What is the balance in the pre-consolidation Income (loss) from Subsidiary account for 2016?

a.​$438,950

b. ​$493,000

c.​$434,000

d. ​$500,000

I know the answer but can someone tell me how to get that?

Answer 1

Answer : option a $438950

please refer to the following workings;

Particulars	Amount
Original cost of equipment	$350,000
Less:   Accumulated depreciation	$110,000
Book value of equipment	$240,000
Remaining useful life	10
Annual depreciation	$24,000
Machine transferred on April 1, 2016. Therefore, Depreciation on this machine would be calculated for 9 months. i.e(April to December)
Actual depreciation on equipment (24000*9/12)	$18,000
Annual depreciation expense reported (306000/10)	$30,600
Machine transferred on April 1, 2016. Therefore, Depreciation on this machine would be calculated for 9 months. (April to December)
Depreciation expense reported for 9 months (30600*9/12)	$22,950
Less:   Actual depreciation on equipment	$18,000
Excess Depriciation recorded	$4,950
Original cost of equipment	$350,000
Less:  Accumulated depreciation	$110,000
Book value of equipment	$240,000
Sale of equipment	$306,000
Less: Book value of equipment	$240,000
Gain on sale of equipment	$66,000
Reported net income of Barre (subsidiary) company in 2016	$500,000
ADD  Eliminate the effect of "Excess depreciation recorded"	$4,950
LESS :Eliminate the effect of "Gain on sale of equipment"	($6,000)
Balance in the pre-consolidation Income (loss) from Subsidiary account for 2016	$498,950

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