Question

On July 1, 2018, Pearl Industries sold administrative equipment with a book value of $1,000,000 to its subsidiary, Shiek Shoes, for $800,000. At the date of sale, the equipment had a remaining life of five years. It is being straight-line depreciated on Shiek's books. It is now December 31, 2020, the end of the accounting year, and you are preparing the working paper to consolidate the trial balances of Pearl and Shiek. Shiek still owns the equipment.

a. Prepare the required eliminating entries for this intercompany equipment sale for the December 31, 2020, consolidation working paper.

b. It is now December 31, 2021. Prepare the required eliminating entries for this intercompany equipment transaction for the December 31, 2021 consolidation working paper.

c. Now assume that Shiek sells the equipment to an outside party for $400,000 on January 1, 2022. What is the consolidated gain on the sale of equipment? What is the gain reported by Shiek? Prepare the required eliminating entries for the December 31, 2022 consolidation working paper.

Answer 1

ANSWER

As per the given question,

Ques No.	Date	Account titles	Debit	Credit
a	31-12-20	Investment in Sheik	140,000
		Equipment, net		140,000
		To eliminate the beginning-of-year unconfirmed gain.
		$200,000 – [($200,000/5) x 1 ½] = $140,000.
		Equipment, net	40,000
		Depreciation expense		40,000
		To eliminate the excess depreciation recorded by Shiek in 2020 ($200,000/5).
b	31-12-21	Investment in Shiek	100,000
		Equipment, net		100,000
		To eliminate the beginning-of-year unconfirmed gain.
		$200,000 – [($200,000/5) x 2 ½] = $100,000.
		Equipment, net	40,000
		Depreciation expense		40,000
		To eliminate the excess depreciation recorded by Shiek in 2020 ($200,000/5).
c	31-12-22	Investment in Shiek	60,000
		Gain on sale of equipment		60,000
		To recognize the remaining unconfirmed gain as confirmed.
		$200,000 – [($200,000/5) x 3½] = $60,000.

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