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Parent Company holds 75 percent of Surrogate Company’s voting common shares. On December 31, 20X8, Parent...

Parent Company holds 75 percent of Surrogate Company’s voting common shares. On December 31, 20X8, Parent recorded a loss of $20,000 on the sale of equipment to Surrogate. At the time of the sale, the equipment’s estimated remaining economic life was eight years. Required: a. Will consolidated net income be increased or decreased when consolidation entries associated with the sale of equipment are made at December 31, 20X8? By what amount?

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Answer #1

In the consolidation entry the net loss is eliminated by crediting the consolidated income and debiting the value of asset. And, depreciation expense is passed to the extent of remaining useful life. The increase in consolidated income is due to elimination of net loss is higher than the decrease due to depreciation expense. Hence, effectively, the consolidated net income will increase due to sale of equipment.

Increase due to elimination of loss =  $20,000
Less- Parent share in depreciation expense = (20000/8*75%) = ($ 1,875)
Net increase in consolidated net income = $ 18,125

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