Question

Lewis company owns 80 percent of tomassini corporation's stock. you are told that tomassini has sold equipment to lewis and that the following consolidation entries are needed to prepare consolidated statements for 20x9: consolidation worksheet entries debit credit equipment 20,000 gain on sale of equipment 40,000 accumulated depreciation 60,000 consolidation worksheet entries debit credit accumulated depreciation 5,000 depreciation expense 5,000 which of the following is incorrect?

A. Lewis company owns 80 percent of Tomassini corporation's stock.
B. The consolidation entry for equipment includes a debit to Equipment for $20,000 and a credit to Gain on Sale of Equipment for $40,000.
C. The consolidation entry for accumulated depreciation includes a debit to Accumulated Depreciation for $60,000.
D. The consolidation entry for accumulated depreciation includes a debit to Depreciation Expense for $5,000.

Answer 1

The incorrect statement is regarding the consolidation entry for accumulated depreciation that should adjust the accumulated depreciation, not the depreciation expense directly in a consolidated financial statement.

Step-by-step explanation:

The statement 'The consolidation entry for accumulated depreciation includes a debit to Depreciation Expense for $5,000' is incorrect because the proper entry to record the elimination of intercompany profits on the sale of assets within a consolidated financial statement involves adjusting the accumulated depreciation and not the depreciation expense directly.

When consolidating, the full amount of any intercompany profits must be eliminated, including the part that has been depreciated.

Therefore, the correction does not affect the depreciation expense immediately but rather adjusts the carrying amount of the asset and the related accumulated depreciation.

Answer 2

The incorrect statement is option B because the gain on the sale of equipment typically does not exceed the carrying amount of the asset, and there is no indication of a revaluation or similar transaction.

Step-by-step explanation:

The subject of the question involves the consolidation of financial statements in business accounting, specifically addressing intercompany equipment sales and the associated consolidation worksheet entries. When one company owns a significant portion of another company's stock and transactions occur between the two, adjustments must be made to remove the effects of intercompany transactions in consolidated financial statements.

The correct answer to which statement is incorrect is: B. The consolidation entry for equipment includes a debit to Equipment for $20,000 and a credit to Gain on Sale of Equipment for $40,000. This statement is incorrect because typically, the gain on sale of equipment would not exceed the carrying amount of the asset unless there is a revaluation or similar transaction which is not indicated.

Furthermore, the details provided in the question on assets and liabilities such as reserves, bonds, loans, deposits, and equity are not directly relevant to the specific consolidation entries required for the sale of equipment between Lewis Company and Tomassini Corporation.