Question

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2012, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2013:

A. $110,000.
B. $105,000.
C. $100,000.
D. $90,000.
E. $60,000.

Answer 1

E. $60,000.

Step-by-step explanation:

The rule is that when there is intra company sale of assets between companies within a group, the amount of intracompany profit associated with the sale must be eliminated before the asset is included in the consolidated balance sheet. The amount of this profit can be calculate as follows:

Profit on equipment sales = Sales value – (Original equipment cost – Accumulated depreciation)

= $125,000 – ($140,000 – $40,000)

Profit on equipment sales = $25,000

This profit has to be deducted from the sales value to obtain the depreciable value, yearly depreciation expense, and amount to include in the consolidated balance sheet dated December 31, 2013 as follows:

Depreciable equipment value = $125,000 - $25,000 = $100,000

Yearly depreciation expense = $100,000/5 = $20,000

Two years’ depreciation expenses (January 2, 2012 to December 31, 2013) = $20,000 × 2 = $40,000

Amount to include in the consolidated balance sheet dated December 31, 2013 = $100,000 – $40,000 = $60,000.

Therefore, the amount of the equipment (net of depreciation) that should be included in the consolidated balance sheet dated December 31, 2013 is $60,000. The correct answer is therefore E. $60,000.