Question

Pea Company purchased 70 percent of Split Company’s stock approximately 20 years ago. On December 31,...

Pea Company purchased 70 percent of Split Company’s stock approximately 20 years ago. On December 31, 20X8, Pea purchased a building from Split for $300,000. Split had purchased the building on January 1, 20X1, at a cost of $400,000 and used straight-line depreciation on an expected life of 20 years. The asset’s total estimated economic life is unchanged as a result of the intercompany sale.

  1. Record the entry to eliminate the gain on the equipment and to correct the asset's basis.
  2. Record the entry to adjust Accumulated Depreciation.
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Answer #1

In the books of Split:

Cash Account Dr. $300000

Profit on sale of Asset Cr. $60000

Building Account Cr. $240000

(Being sale of Building after profit transferred to Profit on sale of Asset)

Working: Value of Asset as on 01.01.20X1 $400000

Life of the Asset 20 Years

Depreciation for one year 400000/20 = $20000

Depreciation from January 20X1 to December 20X8 (8 years) =$20000*8 = $160000

Building cost at the end of the year 20X8 $400000-$160000 = $ 240000

In the Books of Pea Company:

Building Account Dr $400000

Loss on Inter-transfer of Asset Dr. $ 60000

Cash Account Cr. $300000

Accumulated Depreciation Account Cr. $160000

(Being combained entry passed for the inter unit transfer of Assets after eleminating the gain with the loss)

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