Question

Zest Co. owns 100% of Cinn, Inc. On January 2, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a 5-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over 3 years with no residual value. In Zest's December 31 consolidating worksheet, by what amount should depreciation expense be decreased?

A. $0

B. $8,000

C. $16,000

D. $24,000

Answer 1

Solution:

Option B ($8,000) is the correct answer.

Explanation:

There are two ways we can solve this problem.

Way 1:

First, take the difference in carrying values $72,000-$48,000 = $24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest.

Therefore, $24,000/3 = $8,000

Way 2:

Compute the depreciation for each company:

• Cinn is $72,000/3 = $24,000
• Zest is $80,000/5 = $16,000

Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is $24,000 - $16,000 = $8,000.