Question

Woody Corporation acquired 70% of Buzz Company’s voting common stock on January 1, 20X3, for $158,900....

Woody Corporation acquired 70% of Buzz Company’s voting common stock on January 1, 20X3, for $158,900. Buzz reported common stock outstanding of $100,000 and retained earnings of $85,000. The fair value of the noncontrolling interest was 68,100 on the date of acquisition. Buildings and equipment held by Buzz had a fair value that was $25,000 higher than book value. The remainder of the differential was assigned to a copyright held by Buzz. Buildings and Equipment had a 10-year remaining life and the copyright had a 5-year life on the date of acquisition.

On January 1, 20X5, Buzz sold equipment to Woody for $91,600. Buzz had purchased this equipment on January 1, 20X3 for $100,000 and depreciated it using straight-line depreciation over 10 years with an estimated residual value of $10,000. No change was made to the estimated economic life or residual value of the equipment as a result of the intercompany transfer. Woody uses the fully adjusted equity method.

What entry is needed to eliminate Buzz’s gain on the sale of equipment to Woody?

a.

Dr. Gain on Sale 9,600

Dr. Equipment 8,400

        Cr. Accumulated Depreciation 18,000

b.

Dr. Gain on Sale 11,600

Dr. Equipment 8,400

     Cr. Accumulated Depreciation 20,000

c.

Dr. Accumulated Depreciation 18,000

        Cr. Equipment 8,400

    Cr. Loss on Sale 9,600

d.

Dr. Equipment 8,400

        Cr. Accumulated Depreciation 8,400
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Answer #1

Difference between the following entries gives the elimination entry:

Actual: Equipment as actually recorded in the financial statements (Equipment Dr. 91600, Gain on sale Cr. 9600)

As if: Equipment as recorded in the financial statements as if it had not been transferred (Equipment Dr. 100000, Accumulated Depreciation Cr. 18000)

Difference of the above recorded entries would be: Equipment Dr. 8400, Gain on sale Dr. 9600, Accumulated Depreciation Cr. 18000

Thus, entry needed to eliminate Buzz’s gain on the sale of equipment to Woody:

a.

Dr. Gain on Sale 9,600

Dr. Equipment 8,400

        Cr. Accumulated Depreciation 18,000

THUS, CORECT ANSWER IS OPTION "A"

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