Final answer:
In the consolidation working paper, the net effect of eliminations will be a reduction in the equipment's book value by adjusting for the unamortized intra-group profit and an adjustment to the accumulated depreciation.
Step-by-step explanation:
The question is related to an inter-company transaction involving the sale of assets, specifically equipment, from a parent company to a subsidiary and the subsequent consolidation process. When the parent sold equipment to the subsidiary for $1,000,000 that was originally paid for $600,000, it recognized a gain on sale of assets. However, for the purpose of consolidation, this intra-group transaction must be eliminated to avoid overstating assets and profits.
In a consolidation working paper, the excess amount paid over the book value of the equipment, which is $400,000, needs to be eliminated. This excess amount would have been recognized by the subsidiary as part of the asset's cost on their individual books. Since the equipment had a remaining life of 10 years, the excess amount has to be amortized over those 10 years, which amounts to $40,000 per year (400,000 / 10 years). Therefore, each year, the consolidation will eliminate the $40,000 of excess depreciation expense, and by the year-end, an accumulated depreciation needs to be accounted for as well.
The net effect of eliminations on the consolidation working paper would be a reduction in the equipment's book value by the unamortized intra-group profit and an adjustment in accumulated depreciation to reflect the elimination of the subsidiary's depreciation expense on the intra-group profit portion of the asset's cost.