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On January 1, Year 17, Devi Corp. sold to Charlottetown Ltd. equipment it had purchased for $300,000 and used for eight years. Devi recorded a gain of $28,000 on the sale. The equipment has a total useful life of 15 years and is depreciated on a straight-line basis. Devi holds 70 percent of Charlottetown's voting shares. Neither company owns any other equipment.

Required:

(a) Give the journal entry made by Devi on January 1, Year 17, to record the sale of equipment.

(b) Give the journal entries recorded by Charlottetown during Year 17 to record the purchase of equipment and year-end depreciation expense.

(c) What amounts should be reported on the Year 17 consolidated statements for equipment, accumulated depreciation, depreciation expense, and gain on sale of equipment?

Answer :

Devi Corp: Debit AR/Cash $328k, Accumulated Depreciation $64k, Gain on Sale $28k. Consolidated: Equipment $300k, Accumulated Depreciation $64k, Depreciation Expense $20k, Gain on Sale $28k.

The journal entry made by Devi on January 1, Year 17, to record the sale of equipment would be as follows:

Debit: Accounts Receivable (or Cash) - $328,000

Debit: Accumulated Depreciation - Equipment - $64,000

Debit: Gain on Sale of Equipment - $28,000

Credit: Equipment - $300,000

Explanation:

The debit to Accounts Receivable (or Cash) represents the amount Devi Corp. received from Charlottetown Ltd. for the equipment sale, which is $328,000 ($300,000 + $28,000).

The debit to Accumulated Depreciation - Equipment reduces the accumulated depreciation recorded for the equipment over the eight years of use. The amount is $64,000, calculated as ($300,000 ÷ 15 years) × 8 years.

The debit to Gain on the Sale of Equipment represents the gain realized on the sale, which is $28,000.

The credit to Equipment reduces the equipment's carrying value on Devi's books, which is the original purchase price of $300,000.

(b) The journal entries recorded by Charlottetown during Year 17 to record the purchase of equipment and year-end depreciation expense would be as follows:

Purchase of Equipment:

Debit: Equipment - $300,000

Credit: Accounts Payable (or Cash) - $300,000

Depreciation Expense (for Year 17):

Debit: Depreciation Expense - Equipment - $20,000

Credit: Accumulated Depreciation - Equipment - $20,000

Explanation:

The debit to Equipment represents the purchase cost of the equipment from Devi Corp., which is $300,000.

The credit to Accounts Payable (or Cash) represents the amount Charlottetown Ltd. paid to Devi Corp. for the purchase, which is $300,000.

The debit to Depreciation Expense - Equipment represents the depreciation expense for Year 17, which is calculated as ($300,000 ÷ 15 years).

The credit to Accumulated Depreciation - Equipment increases the accumulated depreciation for the equipment by the amount of the depreciation expense recorded.

(c) The amounts reported on the Year 17 consolidated financial statements for equipment, accumulated depreciation, depreciation expense, and gain on the sale of equipment would be as follows:

Equipment: The consolidated balance for equipment will be $300,000. Since the equipment was sold to Charlottetown Ltd., it will not be included in the Year 17 consolidated balance sheet.

Accumulated Depreciation: The consolidated balance for accumulated depreciation will be $64,000. This represents the accumulated depreciation recorded by Devi Corp. over the eight years of use.

Depreciation Expense: The consolidated depreciation expense for Year 17 will be $20,000. This represents the depreciation expense recorded by Charlottetown Ltd. for the equipment purchased.

Gain on Sale of Equipment: The consolidated gain on the sale of equipment will be $28,000. This represents the gain recorded by Devi Corp. on the sale of the equipment.

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