Facts: Olinto Corporation (subsidiary) sold equipment on January 1, Year 1 to Gearty Corporation (parent) for $100,000. The equipment had a net book value of $70,000 (cost of $90,000 and accumulated depreciation of $20,000), and a remaining life of ten years. January 1, Year 1 journal entry to record the sale on Olinto's books:
DR: Cash $100,000
DR: Accumulated depreciation $20,000
CR: Machinery (original cost) $90,000
CR: Intercompany gain on sale of machinery $30,000
January 1, Year 1 journal entry to record the purchase on Gearty's books:
DR: Machinery $100,000
CR: Cash $100,000
December 31, Year 1 journal entry to record the depreciation on Gearty's books:
DR: Depreciation expense ($100,000/10) $10,000
CR: Accumulated depreciation $10,000
December 31, Year 1 workpaper elimination entry- Elimination of intercompany gain and adjustment of the machine and accumulated depreciation accounts to their original balance:
DR: Intercompany gain on sale of machinery $30,000
CR: Machinery ($100,000 – $90,000) $10,000
CR: Accumulated depreciation $20,000
The depreciation expense recorded by Gearty is overstated by the intercompany profit included in the cost of the machinery.
Workpaper elimination entry- Elimination of excess depreciation :
DR: Accumulated depreciation $3,000
CR: Depreciation expense $3,000
I desperately need help understanding this problem. It's an example from pg. 50 of 2014 Becker FAR. I get everything except for the first 12/31/Y1 elimination entry involving machinery and acc. dep. Can someone please explain to me how a credit entry of 20,000 adjusts the acc. dep. to its original balance? I get that for machinery, 100-90-10(elimination entry)=0. But for acc. dep., 10-20+20=10. Please help! Thank you!
.