Question

On January 1, 2011, Sub sold an asset to Parent for $175,000. Sub's books showed original cost and accumulated depreciation of $260,000 and $160,000, respectively, at the date of sale. The asset had a remaining life of five years, and is being depreciated by the straight-line method. Parent owns 80% of Sub. On December 31, 2012 (two years after the sale):

Answer 1

The question is about the preparation of consolidated financial statements involving intercompany asset transactions and depreciation, where a subsidiary sold an asset to its parent company, affecting the calculation of book value and depreciation for the consolidation process.

Step-by-step explanation:

The student's question is related to the calculation of consolidated financial statements in accounting, specifically dealing with intercompany transactions involving assets and depreciation. On January 1, 2011, a subsidiary (Sub) sold an asset to its parent company for $175,000. The book value of the asset at the time of sale from Sub's perspective was $100,000 (original cost of $260,000 minus accumulated depreciation of $160,000). Since the parent (Parent) owns 80% of Sub, consolidation adjustments are required when preparing consolidated financial statements.

The remaining life of the asset after the sale is five years, suggesting the asset should be depreciated at $35,000 per year on a straight-line basis ($175,000 sale price / 5 years). Two years into the asset's remaining life (by December 31, 2012), the accumulated depreciation would be $70,000 ($35,000 per year times 2 years), and the book value in Parent's financial statements would be $105,000 ($175,000 cost minus $70,000 accumulated depreciation). To prepare consolidated financial statements, an elimination entry would be required to remove the effects of the intercompany sale and adjust the asset's carrying amount and accumulated depreciation to what it would have been as if the sale never occurred.