Asked by Julia Michalowski on Jul 09, 2024
Verified
Lobes Co. owns 65% of Banes Limited. During 20X5, Banes sold equipment to Lobes for a gain of $150,000, recognizing a gain on sale (before taxes)of $75,000. Lobes determined that the equipment had a useful life of 10 years, and took a full year's deprecation in 20X5. On April 1, 20X8, Lobes sold the equipment to an unaffiliated company for $110,000. Ignore any taxes.
Required:
Prepare the appropriate consolidation adjustments relating to the equipment for each year ending December 31, 20X5, to 20X8.
Useful Life
The estimated period over which a fixed asset is expected to be useful to the owning entity, beyond which it is considered to be no longer efficient for use.
Consolidation Adjustments
Adjustments made in the preparation of consolidated financial statements to eliminate the effects of intercompany transactions and balances among the entities being consolidated.
Gain on Sale
The financial profit earned from selling an asset at a higher price than its purchase price or book value.
- Master the techniques for eradicating intercompany transactions during the consolidation of financial statements.
- Implement adjustments for depreciation and amortization during consolidation for assets transferred between associated entities.
Verified Answer
The various adjustments are provided in journal entry format below:
20X5:
Gain on sale of equipment $75,000 Equipment $75,000\begin{array}{llr} \text { Gain on sale of equipment } &\$ 75,000\\ \text { Equipment } &&\$75,000\\\end{array} Gain on sale of equipment Equipment $75,000$75,000
Accumulated depreciation7,500 Depreciation expense 7,500\begin{array}{llr} \text { Accumulated depreciation} &7,500\\ \text { Depreciation expense } &&7,500\\ \end{array} Accumulated depreciation Depreciation expense 7,5007,500
The net impact of the above adjustments on net income will be to decrease it by $67,500. Of this amount, 35% is attributable to the NCI, while the rest belongs to the owners of the parent.
20X6:
Retained earnings, opening 43,875 NCI 23,625 Accumulated depreciation 7,500 Equipment 75,000\begin{array} { l } \text { Retained earnings, opening } &43,875\\\text { NCI } &&23,625\\\text { Accumulated depreciation } &7,500\\\quad \text { Equipment }&&75,000\end{array} Retained earnings, opening NCI Accumulated depreciation Equipment 43,8757,50023,62575,000 Accumulated depreciation 7,500 Depreciation expense 7,500\begin{array}{llr} \text {Accumulated depreciation } &7,500\\ \text { Depreciation expense } &&7,500\\\end{array}Accumulated depreciation Depreciation expense 7,5007,500
The decrease in the depreciation expense of $7,500 will increase net income by that amount. Of this amount, $2,625 is attributable to the NCI, while the rest is attributable to the owners of the parent.
20X7:
Retained earnings, opening 39,000 NCI 21,000 Accumulated depreciation 15,000 Equipment 75,000\begin{array} { l } \text { Retained earnings, opening } &39,000\\\text { NCI } &&21,000\\\text { Accumulated depreciation } &15,000\\\quad \text { Equipment }&&75,000\end{array} Retained earnings, opening NCI Accumulated depreciation Equipment 39,00015,00021,00075,000 Accumulated depreciation 7,500 Depreciation expense 7,500\begin{array}{llr} \text { Accumulated depreciation } &7,500\\ \text { Depreciation expense } &&7,500\\\end{array} Accumulated depreciation Depreciation expense 7,5007,500
Again, the decrease in depreciation expense of $7,500 will increase net income by that amount. Of this amount, $2,625 is attributable to the NCI, while the rest is attributable to the owners of the parent.
20X8:
Retained earnings, opening 34,125 NCI 18,375 Accumulated depreciation 22,500 Equipment 75,000\begin{array} { l } \text { Retained earnings, opening }&34,125 \\\text { NCI } &&18,375\\\text { Accumulated depreciation } &22,500\\\quad \text { Equipment }&&75,000\end{array} Retained earnings, opening NCI Accumulated depreciation Equipment 34,12522,50018,37575,000 Accumulated depreciation 1,875 Depreciation expense 1,875\begin{array}{ccc}\text { Accumulated depreciation } & 1,875 & \\\text { Depreciation expense } & & 1,875\end{array} Accumulated depreciation Depreciation expense 1,8751,875
(assuming three months' depreciation is taken)
Equpment 75,000 Accumulated depreciation 24,375 Gain on sale of equipment 50,625\begin{array}{lll}\text { Equpment } & 75,000 & \\\text { Accumulated depreciation } & & 24,375 \\\text { Gain on sale of equipment } & & 50,625\end{array} Equpment Accumulated depreciation Gain on sale of equipment 75,00024,37550,625
The overall impact of the above entries on net income will be to increase it by $52,500 × 35% attributable to the NCI, while the rest is attributable to the owners of the parent.
Learning Objectives
- Master the techniques for eradicating intercompany transactions during the consolidation of financial statements.
- Implement adjustments for depreciation and amortization during consolidation for assets transferred between associated entities.
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