Question

Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole Corporation. This interest was purchased on January 1, 1999, when Waterhole’s book values were equal to its fair values. The amount paid by Spiniflex Pigeon included $10,000 for goodwill.

On January 1, 2000, Spiniflex Pigeon purchased equipment for $100,000 which had no salvage value with a useful life of 8 years, depreciated on a straight-line basis. On January 1, 2005, Spiniflex Pigeon sold the truck to Waterhole Corporation for $40,000. The equipment was estimated to have a four-year remaining life on this date. All affiliates use the straight-line depreciation method.

Required:
Prepare all relevant entries with respect to the truck.
1.	Record the journal entries on Spiniflex Pigeon’s books for 2005.
2.	Record the journal entries on Waterhole’s books for 2005.

Answer 1

1. Spiniflex Pigeon's books

Date	Account Titles and Explanation	Debit	Credit
January 1, 2005	Cash	40000
	Accumulated depreciation*	62500
	Equipment		100000
	Gain on sale		2500
	(To record the sale of truck)

*Accumulated depreciation = $100000 x 5/8 = $62500

2. Waterhole's books

Date	Account Titles and Explanation	Debit	Credit
January 1, 2005	Equipment	40000
	Cash		40000
	(To record the purchase of truck)
December 31, 2005	Depreciation expense	10000
	Accumulated depreciation-equipment		10000
	(To record depreciation for the year)