Check Thomson Corporation owns 70 percent of the outstanding-stock of Stayer, In
ID: 2520878 • Letter: C
Question
Check Thomson Corporation owns 70 percent of the outstanding-stock of Stayer, Incorporated. On January 1, 2016, Thomson acquired a building with a 10-year life for $424,000. Thomsorn depreciated the building on the straight-line basis assuming no salvage value. On January 1, 2018, Thomson sold this building to Stayer for $373,600. At that time, the building hada remaining life of eight years but still no expected salvage value. In preparing financial statements for 2018, how does this transfer affect the computation of consolidated net income? Multiple Choice Net income is reduced by $34,400. Net income is reduced by $38,700 Net income is reduced by $29,360 Net income is reduced by $30,100.Explanation / Answer
Annual depreciation for Thomson = $424000/10 = $42400
Book value on date of sale = $424000-$42400-42400 = $339200
sale value of asset = $373600
The asset was sold at $34400 higher than its book value.
Now annual depreciation for Stayer = $373600/8 = $46700
This revised depreciation is higher by $4300 ($46700-$42400)
The net income would thus reduce by $4300+$34400 = $38700
Second option is correct