Question

On January 1, 2017, a subsidiary sold equipment to its parent for $520,000. The subsidiary's original cost was $200,000 and as of January 1, 2017, $20,000 in depreciation had been recorded on the subsidiary's books. At the date of sale, the equipment had a 10-year remaining life, straight-line. It is now December 31, 2021 (5 years since the sale), and the parent still holds the equipment. In the consolidation eliminating entries for 2021, the equipment account (gross cost) is reduced by a net amount of A. $280,000 B. $300,000 C. $340,000 D. $320,000

Answer 1

C. $340,000

Step-by-step explanation:

Compute the Subsidiary's Unrealized Profit

This will help to determine, this will help us get the amount by which the Equipment Account will be reduced.

First, we calculate the Unrealized profit made on selling of the equipment

The equipment was sold for $520,000

The original cost to the Subsidiary was $200,000.

Furthermore, the Accumulated Depreicaiton of the Asset = $20,000

The Net Book Value of the Equipment = Cost - Accumulated Depreciation

The Net Book Value = $200,000 - $20,000 = $180,000

The Profit on Sale of the Equipment

= Sales Value - The Net Book Value

= $520,000 - $180,000 = $340,000