Question

3. Pen Corporation owned equipment with an original cost of $91,000. On January 1, 2019, Pen sold the equipment to Sen Company (a 60%-owned subsidiary) for a price of $82,600. At the time of the intercompany sale, the equipment had been depreciated for $18,200. The equipment has a remaining useful life of 7 years and is straight-line depreciated. On January 1, 2021, Sen sold the equipment to an outside company for $63,200.

(i) Prepare the working paper eliminating entry regarding the equipment for the year ended December 31, 2019.

(ii) Prepare the working paper eliminating entry I-1 regarding the equipment for the year ended December 31, 2020.

(iii) Prepare the working paper eliminating entry regarding the equipment for the year ended December 31, 2021.

Answer 1

The profit on sale of equipment = $ ( 91,000 - 82,600 ) = $ 8,400

(i)

Date	Descripton	Debit	Credit
31-12-2019	Equipment, net	1,200
	Depreciation expense		1,200
	To eliminate the excess depreciation recorded by Sen in 2019 ($8,400/7).

(ii)

Date	Description	Debit	Credit
31-12-2020	Investment in Sen	7,200
	Equipment, net		7,200
	To eliminate the beginning-of-year unconfirmed gain.
	$8,400 – (($8,400 / 7) x 1) = $7,200.
	Equipment, net	1,200
	Depreciation expense		1,200
	To eliminate the excess depreciation recorded by Sen in 2020 ($8,400/7).

(iii)

Date	Description	Debit	Credit
31-12-2021	Investment in Sen	6,000
	Gain on sale of equipment		6,000
	To recognize the remaining unconfirmed gain as confirmed
	$8,400 – (($8,400 / 7) x 2) = $6,000.