Question

: On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a historical cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 for 2012 and 2013, respectively. Prepare the consolidation entries related to the equipment for year 2012 and year 2013

Answer 1

See the explanation below

Step-by-step explanation:

Net book value (NBV)) = $120,000 - $48,000 = $72,000

Unrealized profit on sales of equipment = Selling price - NBV = $84,000 - $72,000 = $12,000

Annual depreciation = $120,000/10 = $12,000

Overcharged depreciation included = $12,000 * 10% = $1,200

Consolidation entries in 2012:

Details Dr ($) Cr ($)

Depreciation expenses 1,200

Reserve account 10,800

Equipment 12,000

Being the unrealized profit on equipment

Accumulated depreciation 12,000

Depreciation expenses 12,000

Being the depreciation charge for the year 2012

Consolidation entries in 2013:

Details Dr ($) Cr ($)

Accumulated depreciation 12,000

Depreciation expenses 12,000

Being the depreciation charge for the year 2013