Question

Pam Corporation holds 70 percent ownership of Spray Enterprises. On December 31, 20X6, Spray paid Pam $31,000 for a truck that Pam had purchased for $36,000 on January 1, 20X2. The truck was considered to have a 15-year life from January 1, 20X2, and no residual value. Both companies depreciate equipment using the straight-line method.

Prepare the worksheet consolidation entry or entries needed on December 31, 20X6, to remove the effects of the intercompany sale.

Answer 1

truck 5,000 debit

gain on sale 7,000 debit

accumulated depreciation 12,000 debit

Step-by-step explanation:

The company will have to adjust to re-enter the truck into the accounting like ifthe sale did not occur.

Thus, as the truck enter Pam for 36,000 and his subsidiary by 31,000

the 5,000 difference must be reversed.

we also have to redo the accumulated depreciation:

36,000 dollar / 15 years = 2,400

from 2002 to 2006 we have 12,000 accumualted depreciation

Last, we have to remove the sain recognized in this gain which is the difference betwene the depreication write-off and the truck price variation.

Answer 2

Worksheet consolidation entries needed on December 31, 20X6, to remove the effects of the intercompany sale.

Date General Journal Debit Credit

December 31, 20X6. Truck $5,000

Gain in sale of equipment

(Bal. Fig.) $7,000

Accumulated depreciation $12,000

- Equipment

We need to compute the value of accumulated depreciation.

Accumulated depreciation = (Original cost / Useful life) * Years until sale

Original cost = $36,000

Useful life = 15 years

Years until sale = 5 (20X2 - 20X6)

Therefore,

Accumulated depreciation = ($36,000 / 15) * 5

Accumulated depreciation = $2,400 * 5

Accumulated depreciation = $12,000

From the above, the value of $5,000 ($36,000 - $31,000) would have to be reversed because it is the netbook value of cost of asset and sales.