On 1/3/x6, Pylux sold equipment costing 100000 to its 100%-owned subsidiary, Sylux, for 80000. At the time of the sale, the equipment had been 50% depreciated (using the straight line method and an assigned life of 10 years). SYlux continued depreciating the equipment by using the straight line method over a remaining life of 5 years.
What are the cost and accumulated depreciation, respectively, of this equipment in the 12/31/x6 consolidated balance sheet?
a. 80000 and 16000
b. 80000 and 56000
c. 80000 and 60000
d. 100000 and 16000
e. 100000 and 60000
The
Correct Answer: e. 100000 and 60000
Explanation:
This is a classic intercompany sale of depreciable asset problem in consolidated financial statements. Here’s a step-by-step breakdown of how we arrive at the correct answer:
1. Original Equipment Info (in Pylux’s books):
- Cost: $100,000
- Depreciation method: Straight-line over 10 years
- At 1/3/x6 (sale date):
- 50% depreciated → Accumulated Depreciation = $50,000
- Net Book Value = $50,000
2. Sale to Subsidiary (Sylux):
- Sold for $80,000 → Upstream sale (subsidiary bought from parent)
- Gain on sale = $80,000 – $50,000 = $30,000 (unrealized)
- This gain is eliminated in the consolidation process since no gain is recognized on intercompany transactions from the group perspective.
3. Sylux’s Depreciation:
- Sylux records the asset at $80,000 and depreciates over 5 years → $16,000/year
- Depreciation expense for 12 months in 20×6 = $16,000
4. Consolidated Balance Sheet Adjustments (as of 12/31/x6):
Cost:
- The original historical cost to the group is $100,000 → no change
- So in the consolidated balance sheet, cost = $100,000
Accumulated Depreciation:
- Originally depreciated $50,000 by Pylux
- Sylux added $16,000 more depreciation during the year
- But from the group’s view, depreciation should continue as if asset was not sold (straight-line over 10 years)
- Depreciation for 20×6 = $10,000 (1 year post-sale depreciation)
- Accumulated depreciation = $50,000 + $10,000 = $60,000
✅ Final Consolidated Figures:
- Cost: $100,000
- Accumulated Depreciation: $60,000
- Answer: (e) 100000 and 60000
All intercompany profit and incorrect depreciation must be reversed for proper group reporting.
Correct Answer and Explanation is: