Question

Dunn Corp. owns 100% of Grey Corp.’s common stock. On January 2, Year 3, Dunn sold to Grey for $40,000 machinery with a carrying amount of $30,000. Grey is depreciating the acquired machinery over a 5-year life by the straight-line method. The net adjustments to compute Year 3 and Year 4 consolidated income before income tax are an increase (decrease) of:

Answer 1

Answer:

Year 3 (8,000)

Year 4  2,000

Explanation:

Year 3

we remove the gain at disposal: (10,000)

and we remove the portion of depreciation forthis amount:

10,000  /  5  = 2,000

Net adjusment (8,000)

Year 4

we remove the additional depreciation which arise from the intra-entity sale: 2,000