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On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for...

On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life. Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.

Assume Republic uses the cost method to account for its investment in Barre. What is the balance in the pre-consolidation Income (loss) from Subsidiary account for 2020?

  1.    $245,750
  2. $165,000
  3.    $ 90,000
  4. $ 88,750

The answer is C. 90,000 but how do you get this ?????

Business   Accounting   
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Answer #1

In cost method to account for investments, we recoard the investment in its historical cost. Once investors makes the first transaction, ther bis not adjustment in that value. in this cost method there are two important accounting rules.

1) The dividend received by investor will recorded as investment income in the books and it shall not affect the investment account.

2) If the investee has in distributed earnings, it will not appear in the books of investor.

In this case the distributed earnings is $90000 and it has recoarded as Income in the books of Republic Company. The earnings reatained by Barre Corporation shall not find a place in the books of Republic Company. The profit on sale of equipment is not treated as an income from subsidiary but income generated on sale of assets only.

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