Company X and Company Z are related companies subject to consolidation. On 1/1/1

Question

Company X and Company Z are related companies subject to consolidation. On 1/1/17, Company X sold machinery to Company Z for $100,000 cash that had an original purchase price of $150,000, useful life of 5 years, accumulated depreciation at the time of sale of $90,000, and was expected to be continued to be depreciated at $30,000 per year had it not been sold. Company Z placed the machine in service on 1/1/17, and is depreciating it over 2 years using straight-line depreciation. The portion of the elimination entry at the time of consolidation to account for any required adjustment to the depreciation expense account would be:

A) Debit to Depreciation Expense of $20,000 B) Credit to Depreciation Expense of $20,000 C) Debit to Depreciation Expense of $10,000 D) Credit to Depreciation Expense of $15,000

Explanation / Answer

Given that accumulated depreciation at the time of sale is $90000 and expected to continued to depreciated at $30000

per year had it not been sold

As machinery sold has life of 5 years, depreciation expense should be = 100000/5=20000 per year

but depreciation expense booked for $30000 per year for 2years after sale which is $60000

Actual depreciation expense to be booked is $20000*2= $40000

Portion of elimination entry at the time of consolidation to account for adjustment

to the depreciation expense account is $20000($60000-$40000)

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