Question

Grey Corp owns 100% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $62,261. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $28,583. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 2 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

Adjustments to be made:-

1) In profit and loss a/c additional depreciation charged due to the transfer must be added back

i.e, 62261-28583=33678

33678/2=16839 (depreciated on straight-line basis with 2 years of remaining life and no salvage value)

Therefore from the above calculation we can see that there is additional depreciation on account of transfer made is 16839, this must be added back i.e credited to consolidated profit and loss a/c

2)The same amount i.e 16839 must be added back to the value of asset

Therefore the adjusting Journal Entry to be made in consolidated financial statements is:-

Machine a/c Dr 16839

To Consolidated Profit and loss a/c 16839