Question

On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. What is the net effect on consolidated net income in 2012 due to the equipment transfer? Increase $2,000. Increase $10,000. Decrease $10,000. Decrease $12,000. Decrease $14,000.

Answer 1

Gain on transfer of equipment = Selling price – Book value of equipment

= Selling price – (Cost of equipment – depreciation of equipment)

=$84,000 – ($120,000 – $48,000)

=$84,000 – $72,000

= $12,000

Now, annual depreciation for Smeder Company = Cost of equipment / useful life

= $120,000/10 = $12,000

And annual depreciation for Collins, Inc. = Cost of equipment / useful life

= $84,000/6 = $14,000

Amortization of gain for first year = $14,000 - $12,000 = $2,000

Therefore the net effect on consolidated net income in 2012 due to the equipment transfer

= Gain on transfer of equipment - Amortization of gain for first year

= $12,000 - $2,000 = $10,000

There will be $10,000 decrease in consolidated net income in 2012 due to the equipment transfer.

Therefore correct answer is option: Decrease $10,000