Question

At the beginning of the current year, the parent sold new equipment for which it paid $1,000,000 to its subsidiary for $1,500,000. The parent had not recorded any depreciation on the equipment. The equipment had a remaining life of 10 years at that time, straight-line.

The subsidiary still has the equipment at year-end. On the consolidation working paper, the net effect of eliminations (I) will be to credit:

	A.	Gain on sale of equipment for $500,000
	B.	Equipment, net of accumulated depreciation for $450,000
	C.	Accumulated depreciation for $50,000
	D.	Depreciation expense for $150,000

Answer 1

On consolidated of the subsidiary books with the holding's, the elimination entry needs to be passed for the unrealised gain from sale of equipment, amounting to, $ 500,000.

Neither the book value of the equipment, net of depreciation, nor the depreciation expenses accounted for in the books of the subsidiary company, is relevant for elimination at the time of consolidation. Only the unrealised gain on sale is relevant for the purpose of eliminating intercompany transaction.