Pitcher Corporation purchased 60 percent of Softball Corporation's voting common stock on January 1, 20X1. On January 1, 20X5, Pitcher received $273,000 from Softball for a truck Pitcher had purchased on January 1, 20X2, for $353,000. The truck is expected to have a 10-year useful life and no salvage value. Both companies depreciate trucks on a straight-line basis. Required:

a. Prepare the worksheet consolidation entry or entries needed at December 31, 20X5, to remove the effects of the intercompany sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. Prepare the worksheet consolidation entry or entries needed at December 31, 20X6, to remove the effects of the intercompany sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

A)

gain at disposal 25,900 debit

truck 80,000 debit

acc depreciation truck 105,900 credit

--to eliminate the sale--

acc dep truck 3,100 debit

depreication expense 3,100 credit

--to elimiante additional depreciation on the truck from subsidiary--

B) in the next year we also adjust for the additional depreciation:

acc dep truck 3,100 debit

depreication expense 3,100 credit

--to eliminate additional depreciation on the truck from subsidiary--

and, for the differnece n the truck valuation we reduce the retained earnings as the truck account keeps being recorded at 273,000 in the subsidiary accounting.

retained earnins 25,900 debit

truck 80,000 debit

acc depreciation truck 105,900 credit

--to eliminate the sale--

Explanation:

Pitcher receive cash for 273,000

Gives a truck with a book value of : 247,100

Therofe it recognize gain for: 25,900

353,000 / 10 = 35,300 depreciation expense

35,300 x 3 years = 105,900 accumulated depreciation

book value

353,000 - 105,900 = 247,100

We must re-enter the truck as if the sale didin't occur and eliminate the gain.

before sale value 353,000 after sale 273,000

toeliminate we must increase the truck by 80,000.

Also, we have to adjust the depreciation on the truck

the depreicaiton should continue to be 35,900

but hte subsidiary made record for:

273,000 / 7 = 39,000

So, we have to eliminate 3,100 depreciation expense.

a). Gain on sale = $273000 - [$353000 - ($353000/10 * 3) ] = $25900

Accumulated depreciation adjustment:

Required = $353000/10 * 4 = $141200

Less:Reported = 273000/7 * 1 = $39000

Required increase = $102200

Depreciation expense = ($353000/10 * 3) - $102200 = $3700

Account title debit credit

Gain on sale of truck $25900

Truck $80000

Accumulated depreciation $105900

Accumulated depreciation $3700

Depreciation expense $3700

b).

Account title debit credit

Investment in softball $22200

Truck $80000

Accumulated Depreciation $102200

Accumulated depreciation $3700

Depreciation expense $3700