Question

Photo Industries has owned 80 percent of Shutter Corporation for many years. On January 1, 20X6, Photo paid Shutter $270,000 to acquire equipment that Shutter had purchased on January 1, 20X3, for $288,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life. Photo reported operating earnings of $110,000 for 20X8 and paid dividends of $40,000. Shutter reported net income of $44,000 and paid dividends of $22,000 in 20X8.

c. Prepare the consolidation entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8.

Answer 1

A.
Consolidated net income for 20X8:
Operating income reported by Photo		$        110,000
Net income reported by Shutter	$        44,000
Amount of gain realized in 20X8
($18,000 / 12 years)	$          1,500
Realized net income of Shutter		$          45,500
Consolidated net income		$        155,500
B.Consolidated net income for 20X8 would be unchanged.
C,
Eliminate the gain on Equipment & correct asset's basis:
Investment in Shutter	$        12,000
NCI in NA of Shutter	$          3,000
Equipment	$        18,000
Accumulated Depreciation		$          33,000
Accumulated Depreciation	$          1,500
Depreciation Expense		$            1,500