Pea Company purchased 70 percent of Split Company's stock approximately 20 years ago. On December 31, 20X8, Pea purchased a building from Split for $300,000. Split had purchased the building on January 1, 20X1, at a cost of $400,000 and used straight-line depreciation on an expected life of 20 years. The asset's total estimated economic life is unchanged as a result of the intercompany sale.

Required:

a. What amount of depreciation expense on the building will Pea report for 20X8?

b. What amount of depreciation expense would Split have reoportedfor 20X8 if it had continued to own the building?

a. 0

b. $20,000

Explanation:

a. Pea Company would have reported no or nil depreciation expense on the building for 20X8 as the building was bought on that day and will most likely be available for depreciation on the following day January 1, 20X9.

b. Split company would have reported a depreciation expense of $20,000 for 20X8 if it had continued to own the building. This is the amount to be charged yearly as depreciation expense by Split as shown below;

As at January 1, 20x1,

Cost of asset = $400,000

Expected life = 20 years

Yearly depreciation expense = Cost/expected life

Depreciation expense = 400,000/20

= 20,000

This is the cost to be charged to depreciation expense in the books of Split at the end of 20X8 and if the company had continued to own the assets as the asset were disposed at the end if the year.