[tnyfn20]

Becker Question –

Does anyone know how they came up with this answer? It’s is question CPA-00450

Port owns 100% of Salem Inc. On January 1, Year 1, Port sold Salem delivery equipment at a gain. Port owned the equipment for two years and used a 5 year straight line depreciation rate with no residual value. Salem is using a three year straight line depreciation rate with no residual value for the equipment. In the consolidation income statement, Salem’s recorded depreciation expense for year 1 will be decreases by:

a) 20% gain on sale
b) 33.33% gain on sale
c) 50% gain on sale
d) 100 % gain on sale

The correct answer is B but I am not sure how they got there.

 

 

AUD- 78
BEC 79
FAR 78
REG 77

[thechamp26]

Generally speaking, calculating a gain is proceeds – (cost – AD). Since Port already claimed the depreciation for year 1 in the computation of the gain, Salem cannot deduct depreciation in year 1. The depreciation rate for year 1 of a depreciable asset with a 3 year life is 33.33%.

[jimboace88]

I remember that question…it was an awful one. Why can't they just give us numbers instead of talking about it up in the clouds and beating around the bush?

Anyway, the way that I got this to come out (and it was probably wrong) was that I took 2/3, which gave me 66.67%. I then subtracted that from 100%, which gave me 33.3%. The number was there, so I chose it. I didn't spend time dwelling on it because I knew it was a minute concept and if I get depreciation questions on the exam, I'm expecting them to be questions with actual numbers and not some crazy “what if this happened but we're not going to give you any more details” kind of question. Hope I'm right on that front.

FAR 07/27/11 - 87
AUD 10/01/11 - 85
BEC 11/15/11 - 87
REG 01/03/12 - 92

[kb24]

Since Port used a 5 year depreciation schedule, its depreciation expense for the year in question would have been 1/3 of the remaining value. Since Swan uses a 3 year schedule, its depreciation expense would be equal to 1/3 of its total cost which is equal to Swan's remaining value plus Swan's gain. The difference between the two equals 1/3 of the gain.

FAR 4/1/11 - 89
AUD 4/15/11 - 85
REG 4/29/11 - 80
BEC 5/13/11 - 85

[Anonymous]

The best way to solve % or ratio type of questions is to substitute with real numbers.

Assume:

Original cost of machine by Port = 100

Depr. by Port = 100/5 = 20 per year

When Port sold it to Salem after using 2 years, CV = 100 – 20*2 = 60

Let's say Port sold it to Salem at a gain for $90 (I use 90 here cause it's easier to calculate)

So Salem record the cost as 90, and NEW Depr. by Salem = 90/3 = 30 per year

In consolidated I/S, depreciation is over stated by 30 – 20 = 10 per year

so 10/30 = 33.3%

Hope that helps!

[thechamp26]

cpaon – what if the gain was say $200 instead of $90?

200/3 = 66.6

66.6 – 20 = 46.6

46.6/66.6 = 70%

[thechamp26]

I think you are on the right track, though. The whole purpose of consolidated financial statements is to eliminate intercompany transactions. The gain on the sale of the property would cause an increase in NBV to Salem, which in turn, would result in an overstatement of depreciation expense. We have to eliminate the excess depreciation expense, which is the gain or the increase in NBV from P to S. We know the asset has 3 years left, so the the current year depreciation is 1/3 or 33.33. So since we know intercompany transactions are eliminated at the consolidated level, the gain/excess depreciation is reduced by 33.33% in year 1, year 2 and year 3.

[tnyfn20]

Thanks for all of your help. I agree with jimboace88 though. Why can't they give us numbers!

AUD- 78
BEC 79
FAR 78
REG 77

[jaqs]

I wanted to post this here in case anyone else is looking for guidance on this question since this webpage comes up first on google in searching for this question.

Correct depreciation as if equipment was not sold to Sub is 1/5 per year.

Since Parent sold Sub at at beginning of assets third year, correct depn at that point going fwd would be 1/3 of BV per year.

Sub's actual depreciation is 1/3 (BV+Gain), or 1/3 BV + 1/3 Gain. Since 1/3 BV is correct, the overstated amount is 1/3 of Gain. i.e recorded depreciation expense should be decreased by 1/3 of Gain.

[Author]

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