On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp.,

Question

On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2013 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2013 would have been

A. $144,000.

B. $148,375.

C. $109,000.

D. $134,000.

E. $139,625.

The answer is E but I am not sure how to get it.

Explanation / Answer

Cost of the asset = $125000

Accumulated depreciation is $45000.

The remaining life = 8 years.

Salvage value = $0

so depreciation per year for the remaining useful life of 8 years = (125000 - 45000) / 8 = $80000

The cost of the asset to the subsidiary = $115000

Depreciation charged by the subsidiary = $115000 / 8 = $14375

Additional depreciation charged = $14375 - $10000 = $4375

In the consolidated balance sheet, the depreciation expnese would have been

= $84000 + $60000 - $4375

= $139625

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