Question

Grey Corp owns 100% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $66,000. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $25,000. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 9 years of remaining life and no salvage value. Blue plans to adopt the same depreciation assumptions as Grey. What elimination adjustments with respect to this sale must be made to consolidated net income in 2018 (ignoring income tax effects)

Answer 1

Answer:

Journal 1 - Eliminate gain on sale :

Debit : Other Income  ($66,000 - $25,000)  $41,000

Credit : Machinery  $41,000

Journal 2 - Eliminate the unrealized profit from the sale :

Debit : Accumulated depreciation  $4,556

Credit : Depreciation $4,556

Explanation:

Grey Corp and Blue Company are in a group of Companies. Grey Corp is the Parent and should prepare Consolidated Financial Statements . Blue Company is a subsidiary (Grey owns more that 50 % of voting rights in Blue Company).

When preparing Consolidated Financial Statements, intragroup transaction must be eliminated. As they happen, a Company trades within its-self that is the reason they should be eliminated.

Concerning the sale of machine by Grey (Parent) to Blue (Subsidiary), we must first eliminate the Income (gain on sale) in Parent as well as the asset that sits in the Subsidiary.

Debit : Other Income  ($66,000 - $25,000)  $41,000

Credit : Machinery  $41,000

Also, we have to eliminate the unrealized profit on the  gain of the asset sold.

Debit : Accumulated depreciation  $4,556

Credit : Depreciation $4,556

Deprecation calculation :

Deprecation = $41,000 ÷ 9 = $4,556