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28 January, 08:37

On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2013 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2013 would have been

A. $144,000.

B. $148,375.

C. $109,000.

D. $134,000.

E. $139,625.

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  1. 28 January, 09:50
    0
    E. $139,625

    Explanation:

    Because Starker Corp. is subsidiary of Payton Co., then the cost of equipment to be depreciated in balance sheet of Starker = sold amount to subsidiary - cost of the equipment + balance in accumulated depreciation = $115,000 - $125,000 + $45,000 = $35,000

    The depreciation expenses to be booked in every 8 years using straight-line depreciation = $35,000 / 8 = $4,375

    Because Payton Co. booked all the balance in accumulated depreciation in expenses in 2013 when it sold equipment to subsidiary, thus it has to deduct subsidiary's depreciation expense of this equipment in consolidation of 8 years

    The amount of depreciation expense on the consolidated income statement for =

    depreciation in Payton Co. + depreciation in subsidiary / Starker

    = $84,000 + $60,000 - depreciation of this equipment $4,375

    = $139,625
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