Fact Pattern:Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, Year 4. The following information is from the condensed Year 4 income statements: Pirn Scroll Sales to Scroll$100,000$ -- Sales to others400,000 300,000 $500,000$300,000Cost of goods sold: Acquired from Pirn-- 80,000Acquired from others350,000 190,000 Gross profit$150,000$ 30,000Depreciation40,00010,000Other expenses60,000 15,000 Income from operations$ 50,000$ 5,000Gain on sale of equipment to Scroll12,000 -- Income before income taxes$ 62,000 $ 5,000 Additional Information Sales by Pirn to Scroll are made on the same terms as those made to third parties.Equipment purchased by Scroll from Pirn for $36,000 on January 1, Year 4, is depreciated using the straight-line method over 4 years.What amount should be reported as depreciation expense in Pirn’s Year 4 consolidated income statement?

Eliminating inter company transactions is an important accounting function that ensures accuracy in a business's financial statements. Intercompany transactions can artificially inflate profits and liabilities in the business, which leads to inaccurate financial statements.In order to determine the amount of depreciation expense relating to Scroll, Inc.. that should be reported in Pirn's Year 4 consolidated income statement, we need to consider the following factors:Pirn sold $100,000 worth of equipment to Scroll on January 1, Year 4.The equipment was depreciated using the straight-line method over 4 years.The original cost of the equipment was $36,000.Based on this information, we can calculate that the annual depreciation expense for the equipment is $9,000 ($36,000 cost over 4 years).Note: The original cost of $36,000 is to be considered here for reporting in the consolidated income statement and not the price of $40,000 at which Pirn Inc., sold to Scroll Inc.,Pirn's own depreciation is given in the question as $40,000.Total depreciation expense reported in the Year 4 consolidated income statement = $40,000 + $9,000 = $49,000.The amount that should be reported as depreciation expense in Pirn’s Year 4 consolidated income statement is $49,000.

Answered: What amount should be reported as…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Fact Pattern:

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, Year 4. The following information is from the condensed Year 4 income statements:

	Pirn	Scroll
Sales to Scroll	$100,000	$ --
Sales to others	400,000	300,000
	$500,000	$300,000
Cost of goods sold:
Acquired from Pirn	--	80,000
Acquired from others	350,000	190,000
Gross profit	$150,000	$ 30,000
Depreciation	40,000	10,000
Other expenses	60,000	15,000
Income from operations	$ 50,000	$ 5,000
Gain on sale of equipment to Scroll	12,000	--
Income before income taxes	$ 62,000	$ 5,000

Additional Information

Sales by Pirn to Scroll are made on the same terms as those made to third parties.
Equipment purchased by Scroll from Pirn for $36,000 on January 1, Year 4, is depreciated using the straight-line method over 4 years.

What amount should be reported as depreciation expense in Pirn’s Year 4 consolidated income statement?

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