On January 2, 2015, P Company sold a piece of equipment to its 80% subsidiary S

Question

On January 2, 2015, P Company sold a piece of equipment to its 80% subsidiary S Company. The equipment originally cost P Company $50,000 and had accumulated Depreciation of $20,000. P sold it to S for $35,000. It has a remaining useful life of 5 years. P uses the cost method to record its investment in S.

Assume that S Company sells the equipment for $20,000 to a third party after it has owned the equipment for three years. What is S Company's gain and the consolidated gain from the sale?

$6,000 S Company's Gain; $8,000 Consolidated Gain

$6,000 S Company's Gain; $9,000 Consolidated Gain

$5,000 S Company's Gain; $9,000 Consolidated Gain

$5,000 S Company's Gain; $8,000 Consolidated Gain

$6,000 S Company's Gain; $8,000 Consolidated Gain

$6,000 S Company's Gain; $9,000 Consolidated Gain

$5,000 S Company's Gain; $9,000 Consolidated Gain

$5,000 S Company's Gain; $8,000 Consolidated Gain

Explanation / Answer

Ans is A. $6,000 S Company's gain ;$ 8,000 Consolidated Gain

Working note:

1. Calculation of Consolidated gain

Original equipment cost $50000- Accumulated Depreciation $20000 =$ 30000

Remaining useful life is 5 years.

So depreciation per year = $ 30000/5= $ 6000

The asset is sold after 3 years. So after 3 years the asset value is $30000 - ($6000 ×3)=$12,000

Note that $6000×3 is depreciation of 3 years.

The asset has value of $ 12,000 and it is sold for $20,000. That means consolidated gain = $20000- $12000= $8000

NOTE:Under the cost method, the investment stays on the balance sheet at its original cost.

2.Calculation of S company's gain

Original cost to S company= $35,000

Depreciation for S Company per year = $35,000/5= $ 7000 per year

Three years depreciation for S company= $7000 × 3= $21,000

Value of equipment for S Company after 3 years= $35000- $ 21000=$ 14000

Gain from sale of equipment for S Company =$ 20000-$14000= $ 6000

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