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Upstream Sale of Equipment in Prior Period

E6-11 Upstream Sale of Equipment in Prior Period
Baywatch Industries purchased 80 percent ownership of Tubberware Corporation on January 1, 20X0, at underlying book value. On January 1, 20X6, Baywatch paid Tubberware $270,000 to acquire equipment
that Tubberware had purchased on January 1, 20X3, for $300,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life.

Baywatch reported operating earnings of $100,000 for 20X8 and paid dividends of $40,000. Tubberware reported net income of $40,000 and paid dividends of $20,000 in 20X8.
a. Compute the amount reported as consolidated net income for 20X8.

b. By what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale?

c. Give the eliminating entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8.

Solution Preview

Depreciation expense: purchaser = ($270,000 / 12) = $22,500; consolidated = ($300,000 / 15) = $20,000
Gain realized each year = differential depreciation = $20,000 - $22,500 = $2,500 credit (gain realized)
Also note: there is no purchase differential to write-off or amortize since purchase price = book value

(a) Baywatch's separate operating ...

Solution Summary

The solution explains the impact on financial statements of an upstream sale of equipment in prior period