Question

On January 1, Poe Corp. sold a machine for $4,369,577 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1.1 million for this machine, which had accumulated depreciation of $250,000 on the sale date. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line basis over 20 years, a policy that Saxe continued. In Poe's December 31 consolidated balance sheet, the accumulated depreciation of this machine should be shown on the consolidated balance sheet as:

Answer 1

Answer : 250000+50000

= 300000

The effects of a sale of fixed assets between firms within a consolidated group must be eliminated - as though the transaction never occurred. To the consolidated entity the asset should be reported the same as it would have been had the transfer never taken place. Thus, in the consolidated balance sheet the machine would be reported at the original cost of $1,100,000 with one more year of depreciation based on the original cost ($1,100,000 - $100,000 = $1,000,000/20 years = $50,000/year), bringing the accumulated depreciation to
300000(250000+50000)