Question

Prince Company owns 104,000 of the 130,000 shares outstanding of Serf Corporation. Serf Corporation sold equipment to Prince Company on January 1, 2017 for $740,000. The equipment was originally purchased by Serf Corporation on January 1, 2016 for $1,280,000 and at that time its estimated depreciable life was 8 years. The equipment is estimated to have a remaining useful life of four years on January 1, 2017. Both companies use the straight-line method to depreciate equipment. In 2018 Prince Company reported net income from its independent operations of $3,270,000, and Serf Corporation reported net income of $820,000 and declared dividends of $60,000. Prince Company uses the cost method to record the investment in Serf Company.
Required: A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2018 consolidated financial statements workpapers.

Answer 1

Answer:

Journal 1

At the beginning of the year

Debit : Equipment $380,000

Credit : Retained Earnings ($380,000 - $95,000) $285,000

Credit ; Accumulated Depreciation $95,000

Journal 2

During the year :

Debit :  Depreciation $95,000

Credit :  Accumulated depreciation $95,000

Explanation:

The sale of equipment to Prince Company is an intragroup transaction and must be eliminated from Prince Company Consolidated Financial Statements as follows :

Carrying Amount before sale :

Carrying Amount = Cost - Accumulated Depreciation

                              = $1,280,000 - ($1,280,000 ÷ 8)

                              = $1,120,000

Unrealized gain / loss =Selling Price - Carrying Amount

                                      = $740,000 - $1,120,000

                                      = $380,000 loss

Eliminate this loss on sale of equipment

2017

Unrealized depreciation = $380,000 ÷ 4

                                          = $95,000

Eliminate this depreciation charge deferred at the beginning of 2018

2018

Unrealized depreciation = $380,000 ÷ 4

                                          = $95,000

Eliminate this depreciation charge deferred during 2018