Question

Dunn Corporation owns 100 percent of Grey Corporation’s common stock. On January 2, 2017, Dunn sold to Grey $40,000 of machinery with a carrying amount of $30,000. Grey is depreciating the acquired machinery over a five-year remaining life by the straight-line method. The net adjustments to compute 2017 and 2018 consolidated net income would be an increase (decrease) of

Note:
A table for 2017 and 2018 income is hereby shown

Answer 1

Answer and Explanation:

Given:

Cost of machine = $40,000

Carrying amount = $30,000

Expected life = 5 year

Computation of Depreciation per year:

Depreciation per year = Cost of machine / Expected life

Depreciation per year = $40,000 / 5

Depreciation per year = $8,000

Computation of Income from sale:

Income from sale = Cost of machine - Carrying amount - Depreciation

Income from sale = $40,000 - $30,000 - $8,000

Income from sale = $2,000

Computation of historical Depreciation:

Historical Depreciation = Carrying amount / Expected life

Historical Depreciation = $30,000 / 5

Historical Depreciation = $6,000

Computation of Consolidated Net Income:

Consolidated Net Income = $8,000 - $6,000

Consolidated Net Income = 2,000

2017 Net income reduce by $8,000

2018 Net income increased by $2,000