Stern Manufacturing purchased an ultrasound drilling machine with a remaining 10

Question

Stern Manufacturing purchased an ultrasound drilling machine with a remaining 10-year economic life from a 70 percent-owned subsidiary for $360,000 on January 1, 20X6. Both companies use straight-line depreciation. The subsidiary recorded the following entry when it sold the machine to Stern:

Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercompany sale of equipment when consolidated financial statements are prepared as of (a) December 31, 20X6, and (b) December 31, 20X7. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Stern Manufacturing purchased an ultrasound drilling machine with a remaining 10-year economic life from a 70 percent-owned subsidiary for $360,000 on January 1, 20X6. Both companies use straight-line depreciation. The subsidiary recorded the following entry when it sold the machine to Stern:

Explanation / Answer

Part A)

We will have to pass the first journal entry to eliminate the gain on equipment and also correct the basis of the asset. The relevant journal entries are as follows:

_______

Part B)

For the second year also, we will have to pass the first journal entry to eliminate the gain on equipment and also correct the basis of the asset. The relevant journal entries are as follows:

S.No. Account Titles Debit Credit 1) Gain on Sale $60,000 Equipment (450,000 - 360,000) $90,000 Accumulated Depreciation $150,000 (To eliminate the gain on inter-company sale of equipment and correct asset basis) 2) Accumulated Depreciation (150,000 + 36,000 - 180,000) $6,000 Depreciation Expense $6,000 (To eliminate the excess depreciation)

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