On January 1, 2010, 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 2010 and 2011, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes.
-What is the net effect on consolidated net income in 2010 due to the equipment transfer?
A) Increase $2,000.
B) Decrease $12,000.
C) Decrease $10,000.
D) Decrease $14,000.
E) Increase $10,000.

Question

Quizplus · Accepted Answer

The equipment was transferred for $84,000, but its carrying amount on Smeder's books was $72,000 ($120,000 cost less $48,000 accumulated depreciation). Therefore, Smeder will recognize a loss of $12,000 on the transfer ($84,000 - $72,000). Since all the net income effects of the intra-entity transfer are attributed to the seller (Smeder), its net income for the year will decrease by $12,000. As Collins owns 80% of Smeder, this translates to a decrease in consolidated net income of $10,000 ($12,000 x 80%).

On January 1, 2010, Smeder Company, an 80% Owned Subsidiary