d Fair value Fair value Port Inc owns 100 percent of Salem I

d. Fair value Fair value Port Inc. owns 100 percent of Salem Inc. On January 1, 20x2, Port sold delivery equipment to m at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem\'s recorded depreciation expense on the equipment for 20X2 will be decreased by 20 percent of the gain on the sale. b. 33/s percent of the gain on the sale c. 50 percent of the gain on the sale. d. 100 percent of the gain on the sale. On January 1, 20X0, Poe Corporation sold a machine for $900,000 to Saxe Corporation, its wholly owned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine using the straight- line method over 20 years, a policy that Saxe continued. In Poe\'s December 31, 20X0, consolidated balance sheet, this machine should be included in fixed-asset cost and accumulated depreciation as 4. Accumulated Depreciation ov Cost a. $1,100,000 $300,000 b. $1,100,000 $290,000 c. $ 900,000 40,000 d. $ 850,000 $ 42,500 5. Scroll Inc., a wholly owned subsidiary of Pirn Inc., began operations on January 1, 20X1. The following information is from the condensed 20X1 income statements of Pirn and Scroll: Pirn Scroll

Solution

3) Option (B) 33 1/3 percent of the gain on the sale.

Depreciation expense will be decreased by 33 1/3% of the gain on sale, the amount that depreciation expense has been overstated.

Example:

Original purchase price by port = $100

Two years depreciation ($100 / 5 = $20 per year X 2 ) = (40)

Net book value at date of sale = 60

Sale price to salem = 75

Gain on sale = 15

Depreciation expense recorded by salem (75 / 3 year life ) = 25

Consolidated depreciation expense ($100 / 5 year life) = 20

Elimination of excess depreciation ($15 gain X 1/3) = 5

4) Option (A) $1,100,000 & $300,000

Depreciation should continue as if the sale had not occurred. Depreciation for the current year is $50,000 [(1,100,000 - 100,000) / 20]. Accumulated depreciation at 12/31/Y10 is $300,000 (250,000 + 50,000).