Question

Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, Year 1, Fire sold equipment to Water at a price in excess of Fire's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, Year 1, the carrying amount of the (cost less accumulated depreciation) equipment should be reported at:

Answer 1

C) Water's original cost less Fire's recorded gain.

Step-by-step explanation:

If they were independent companies, Water and Fire should record this transaction the following way: Fire will dispose the asset and report a gain, and Water should record the asset at purchase cost.

But since Water controls Fire, they must present a consolidated balance, so no actual sale can be recorded, so Fire cannot report a gain. Water should record the asset at its original cost - Fire's gain.