Question

At the beginning of 2019, a subsidiary sells equipment with a book value of $400,000 to its parent for $500,000. At the time of the sale, the equipment had a remaining life of 5 years, straight-line. The parent still has the equipment at the end of 2020 (2 years later).

On the consolidated financial statements for 2020, how is the equipment reported?

	A.	Book value $320,000, depreciation expense $80,000
	B.	Book value $200,000, depreciation expense $100,000
	C.	Book value $400,000, depreciation expense $100,000
	D.	Book value $240,000, depreciation expense $80,000

Answer 1

Cost of the equipment in the hands of parent Company will be equal to $400,000

Depreciation Expense = {$400,000) / 5 = $80,000

So, book value at the end of 2020 is $400,000 - ($80,000 * 2 years)

= $240,000

So, Book value = $240,000

Depreciation Expense = $80,000

Option 'D' is correct