[calicpa]

In the solution where does the 12k gain come from?

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, 2005. The following information is from the condensed 2005 income statements of Pirn and Scroll:

Pirn Scroll

Sale to Scroll $100,000 $-

Sales to others 400,000 300,000

500,000 300,000

Cost of goods sold:

Acquired from Pirn – 80,000

Acquired from others 350,000 190,000

Gross profit 150,000 30,000

Depreciation 40,000 10,000

Other expenses 60,000 15,000

Income from operations 50,000 5,000

Gain on sale of equipment to Scroll 12,000 –

Income before income taxes $38,000 $5,000

Additional information:

Sales by Pirn to Scroll are made on the same terms as those made to third parties.

Equipment purchased by Scroll from Pirn for $36,000 on January 1, 2005, is depreciated using the straight-line method over four years.

What amount should be reported as depreciation expense in Pirn’s 2005 consolidated income statement?

A. $50,000

B. $47,000

C. $44,000

D. $41,000

Correct!

The gain on the equipment sold to Scroll must be eliminated, since it was not sold outside the consolidated entity. With the elimination of the gain, one must also eliminate the depreciation of the gain that Scroll would have been booking (based on their higher purchase price). This excess depreciation is $3,000 a year ($12,000 gain/4 years).

This would reduce the total consolidated depreciation from $50,000 ($40,000+$10,000) to $47,000.

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[carpeCPA]

This is how I look at intercompany transactions –

The $12000 is the gain on the sale of the equipment given to you in the problem. We want to look at the economic entity as a whole, not the individual companies. Selling an asset to a subsidiary is like moving the asset from the Sales department to the Customer service department; there is no change in cost or life to the entity as a whole.

Scroll has the entity booked at $36000 and is depreciating over 4 years = $9000 annual depreciation expense.

If Pirn still had it, the asset would be booked at $24000 ($36000 – $12000 gain) = $6000 annual depreciation expense

Because the asset just “moved departments”, we can't magically make it more expensive in one department than the other. So, we need to get the depreciation expense back to it's original amount (in the “original department” – Prin), $6000.

Therefore, $9000 – $6000 = $3000; depreciation expense needs to be reduced by $3000.

Sorry if this ends up being more confusing; I hope it helps.

REG - 93 (Jul'13)
FAR - 97 (Dec '13)
AUD - 99 (May '14)
BEC - Jul '14

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[calicpa]

thanks it did

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[ron10590]

if a subsidiary pays dividends –to the parent and to outside parties, why isn't the payment to outside parties recorded as a dividend payment on the consolidated balance sheet?

REG (7/14): 82
FAR (11/14): 81
BEC (1/15): 83
AUD (5/15):

[Author]

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