On January 1, 2006, 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 2006 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively.
A. Create the eliminations for consolidation due to the following transaction for 2006 and 2009. That would be TA, ED, *TA, and *ED.
B. What is the amount of depreciation on the 2006 consolidated income statement?
Before you begin to answer the given questions, you may want to note certain general information as it relates to intercompany transactions. You need to understand firstly, what intercompany transactions are; secondly, what the different types of intercompany transactions are; third, the directions in which intercompany transactions may flow (that is, upstream and downstream) and the differences between them; as well as, the entries required to eliminate intercompany transactions for consolidation purposes. Understanding the differences between upstream and downstream intercompany transactions is very important especially when preparing elimination entries. Note the following excerpts below (taken from http://www.wiley.com/college/bline/0471327751/samplechapter/ch04.pdf) which relates to the first three items above that you need to understand.
What are intercompany transactions? - "An intercompany transaction occurs when one unit of an entity is involved in a transaction ...
The amount of depreciation is determined.