1. A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2019. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value. How will the intercompany eliminations for this transaction affect consolidated income for 2020, assuming the subsidiary still holds the equipment? A. $64,000 decrease B. $12,800 increase C. $16,000 increase D. $48,000 decrease

Question

Sam Henry

Business

23 October, 20:44

1. A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2019. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value. How will the intercompany eliminations for this transaction affect consolidated income for 2020, assuming the subsidiary still holds the equipment? A. $64,000 decrease B. $12,800 increase C. $16,000 increase D. $48,000 decrease

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Answers (1)

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Marlie Wilcox · Answer 1

C. $16000 increase

Explanation:

we need to first calculate the depreciation for the equipment, so we are given the gain of equipment if it is to be sold of $80000 which is the fair market value price of the equipment and we are further told that the subsidiary uses straight line depreciation with no residual value which this means that the equipment will depreciate up till it is $0 and that its depreciation will be calculated as follows:

Depreciation = cost of equipment / number of years left on equipment

= $80000/5

= $16000

straight line depreciation is where the asset is used over its useful life as calculated above. Then there will be an increase in income by 2020 up until the equipment is gone then this transaction will be adjusted.