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Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2016,...

Thomson Corporation owns 70 percent of the outstanding stock of Stayer, Incorporated. On January 1, 2016, Thomson acquired a building with a 10-year life for $326,000. Thomson depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2018, Thomson sold this building to Stayer for $288,800. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2018, how does this transfer affect the computation of consolidated net income?

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Answer #1
Answer :
                    Annual depreciation   = $326,000 / 10 Years
                                                                 = $32,600
Book value on date of sale = $326,000-2 years x $32,600
                                                       = $260,800
Sale value of asset = $288,800
Difference   = $288,800 (-) $260,800
                         = $28,000
Asset was sold at $28,000 higher than its book value.
Annual depreciation for Stayer = $288,800 / 8 years
                                                                = $36,100
Revised depreciation is higher by $3,500 ($36,100 (-) $32,600)
Net income would be reduced by $3,500 + $28,000 = $31,500
Net income is   reduced by $31,500
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