Baywatch industries has owned 80 percent of Tubberware Corporation for many years. on January 1, 20×6, Baywatch paid Tubberware $270,000 to acquire equipment that Tubberware had purchased on January 1, 20×3, for $300,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life. Baywatch reported operating earnings of $100,000 for 20×8 and paid dividends of $40,000. Tubberware reported net income of $40,000 and paid dividends of $20,000 in 20×8.
a. compute the amount reported as consolidated net income for 20×8.
b. by what amount would consolidated net income change if the equipment sale had been a downstream sale rather than an upstream sale?
c. give the eliminating entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20×8
b. Consolidated net income for 20X8 would be $500 greater [$2,500 – ($2,500 x .80)] if the sale of equipment had been from parent to subsidiary on January 1, 20X6.