CPA Bar Question of the Day

Practice CPA Bar with the production-style question-of-the-day selection for this public URL.

Question 1

Intercompany Sale of Depreciable Asset (Year 4) Date of transfer: July 1 Seller: P Co. (Parent) Buyer: S Co. (Subsidiary) Original cost on P's books: 200 Accumulated depreciation at transfer date: 120 Carrying amount at transfer: 80 Selling price to S: 140 (gain = 60) Remaining useful life at transfer: 4 years, straight-line Depreciation recorded by S in Year 4 (half year): 17.5

Which Year 4 consolidation adjustment is required for the intercompany sale of the equipment?

Debit PP&E 60; Credit Gain on sale 60; Debit Depreciation expense 7.5; Credit Accumulated depreciation 7.5.
Debit Gain on sale 60; Credit PP&E 60; Debit Accumulated depreciation 7.5; Credit Depreciation expense 7.5.
Debit Gain on sale 60; Credit Retained earnings 60; Debit Depreciation expense 7.5; Credit Accumulated depreciation 7.5.
Debit COGS 60; Credit Inventory 60; no depreciation adjustment.

Explanation: Consolidation eliminates the intercompany gain (debit Gain, credit PP&E) and reduces depreciation expense to the pre-transfer basis by debiting Accumulated depreciation and crediting Depreciation expense for the excess 7.5. Other options misclassify accounts, reverse the direction, or ignore the depreciation correction.

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CPA Bar

CPA Bar Question of the Day

Practice CPA Bar with the production-style question-of-the-day selection for this public URL.

Question 1

Intercompany Sale of Depreciable Asset (Year 4) Date of transfer: July 1 Seller: P Co. (Parent) Buyer: S Co. (Subsidiary) Original cost on P's books: 200 Accumulated depreciation at transfer date: 120 Carrying amount at transfer: 80 Selling price to S: 140 (gain = 60) Remaining useful life at transfer: 4 years, straight-line Depreciation recorded by S in Year 4 (half year): 17.5

Which Year 4 consolidation adjustment is required for the intercompany sale of the equipment?

Debit PP&E 60; Credit Gain on sale 60; Debit Depreciation expense 7.5; Credit Accumulated depreciation 7.5.
Debit Gain on sale 60; Credit PP&E 60; Debit Accumulated depreciation 7.5; Credit Depreciation expense 7.5.
Debit Gain on sale 60; Credit Retained earnings 60; Debit Depreciation expense 7.5; Credit Accumulated depreciation 7.5.
Debit COGS 60; Credit Inventory 60; no depreciation adjustment.

Explanation: Consolidation eliminates the intercompany gain (debit Gain, credit PP&E) and reduces depreciation expense to the pre-transfer basis by debiting Accumulated depreciation and crediting Depreciation expense for the excess 7.5. Other options misclassify accounts, reverse the direction, or ignore the depreciation correction.