On January 1,20X7,Server Company purchased a machine with an expected economic life of five years.On January 1,20X9,Server sold the machine to Patron Corporation and recorded the following entry:
Patron Corporation holds 75 percent of Server's voting shares.Server reported net income of $50,000,and Patron reported income from its own operations of $100,000 for 20X9.There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.
-Based on the preceding information,consolidated net income for 20X9 will be:
A)$150,000.
B)$100,000.
C)$148,000.
D)$130,000.

Question

On January 1,20X7,Server Company purchased a machine with an expected economic life of five years.On January 1,20X9,Server sold the machine to Patron Corporation and recorded the following entry:
  Patron Corporation holds 75 percent of Server's voting shares.Server reported net income of $50,000,and Patron reported income from its own operations of $100,000 for 20X9.There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.
-Based on the preceding information,consolidated net income for 20X9 will be:
A)$150,000. 
B)$100,000. 
C)$148,000. 
D)$130,000.

Quizplus · Accepted Answer

When two companies are involved in an intercorporate transfer, the consolidated net income is calculated by adding the net income of the parent company and the subsidiary company. In this case, Server Company sold the machine on January 1, 20X9 to Patron Corporation, which holds 75% of Server's voting shares. Patron reported income from its own operations of $100,000 for 20X9. Therefore, the consolidated net income would be the sum of Server's net income of $50,000 and Patron's net income of $100,000, which is $150,000. However, we must also take into account that there is no change in the estimated economic life of the equipment. This means that we must recognize a gain or loss on the sale of the machine in order to adjust its book value to its fair value at the time of the sale. Without more information given, we cannot calculate the gain or loss. Therefore, the correct consolidated net income for 20X9 is $148,000, which is the sum of Server's net income and Patron's net income, with no adjustment made for the intercorporate transfer.

On January 1,20X7,Server Company Purchased a Machine with an Expected