On January 1, 2020, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.What is the net effect on net income as a result of consolidating adjustments made in 2020 with respect to the equipment transfer?
A) Increase net income by $2,000.
B) Decrease net income by $12,000.
C) Decrease net income by $10,000.
D) Decrease net income by $14,000.
E) Increase net income by $10,000.

Question

Quizplus · Accepted Answer

The gain on the sale of equipment is $12,000 ($84,000 - ($120,000 - $48,000)). The gain is eliminated in consolidation, and the excess depreciation ($12,000/6 years = $2,000 per year) is also adjusted. Thus, the net effect on net income is a decrease of $10,000 ($12,000 gain - $2,000 excess depreciation).

On January 1, 2020, Smeder Company, an 80% Owned Subsidiary