Final answer:
The correct option is C. The correct net adjustments to compute 2017 and 2018 consolidated net income due to the sale of machinery from Dunn Corporation to Grey Corporation would be a decrease of $(10,000) in 2017 and an increase of $2,000 in 2018, as the gain on sale is eliminated and excessive depreciation is adjusted.
Step-by-step explanation:
The question pertains to intercompany transactions in consolidated financial statements. Specifically, it involves the sale of machinery by Dunn Corporation to its wholly-owned subsidiary, Grey Corporation, and the subsequent adjustments needed for the consolidated financial statements of the two entities. When Dunn sold the machinery with a carrying amount of $30,000 for $40,000, it realized a gain of $10,000 on the sale.
In consolidation, this gain needs to be eliminated because it is not realized from the perspective of the economic entity formed by Dunn and Grey together. Grey is depreciating the machinery over five years, so the annual depreciation expense is $(40,000/5) = $8,000.
In 2017, the net adjustment to consolidated net income will be a decrease by the full unrecognized gain of $10,000. However, because Grey has been reporting $8,000 depreciation instead of the $6,000 that would have been reported had the asset not been sold at an intercompany gain (i.e., based on the original $30,000 carrying amount), we need to decrease the excessive depreciation of $2,000 thus resulting in an increase to the 2018 consolidated net income.
Therefore, the correct net adjustments would be a decrease of $(10,000) in 2017 and an increase of $2,000 in 2018.
The correct option is c. $(10,000) $2,000.