Reynolds Interiors owns 90% of the outstanding common voting stock of Hertz, Inc.  As a result, Reynolds includes Hertz, Inc. in its consolidated financial statements, as appropriate.  Following is a schedule of Hertz’s net income and dividends declared for 20x1 – 20x3:

	20x1	20x2	20x3
Net income	$100,000	$120,000	$130,000
Dividends declared	40,000	50,000	60,000

As of 1/1/20x1, Reynolds Interiors owned machinery and equipment that they acquired for an original cost of $80,000.

When Reynolds purchased it, the machinery and equipment has an estimated life of 10 years with no salvage value.   At 1/1/20x1, the equipment had a book value of $48,000.  Also, despite having held it for several years, Reynolds’ Controller believes the equipment still has a remaining useful life of 10 additional years.

Assume that, on 4/1/20x1, Hertz, Inc. (Reynolds’ 90% owned subsidiary mentioned above) acquired the equipment from Reynolds Interiors for $60,000.  For depreciation purposes Hertz, Inc. will depreciate the machinery and equipment over the Hertz’s revised estimated remaining useful life.

Required

1. Compute the gain recorded by Reynolds Interiors on 4/1/20x1 associated with the acquisition of the machinery and equipment, on their separate (nonconsolidated) accounting records.  
2. Compute Hertz, Inc.’s annual depreciation expense on their separate accounting records for the acquired machinery and equipment for fiscal year’s 20x1, 20x2, and 20x3, assuming, during that period, they continue to use the machinery and equipment as a productive asset without impairment.
3. Briefly explain how Reynolds Interiors must account for the gain on the machinery and equipment sold to Hertz, Inc. in the company’s consolidated financial statements for fiscal year-ending 20x1, assuming Hertz, Inc. continues to use the machinery and equipment as a productive asset without impairment (no journal entries required).  
4. Briefly explain the accounting implications of the gain on the machinery and equipment sale on Reynolds Interiors consolidated financial statements for fiscal years 20x2 and 20x3, assuming Hertz, Inc. continues to use the machinery and equipment as a productive asset without impairment (no journal entries required).  Consider the effect on the consolidated income statement and the consolidated balance sheet.
5. If, on 1/1/20x4, Hertz, Inc. sells the machinery and equipment to a non-related company for $35,000.  Calculate gain (or loss) on sale would Reynolds Interiors report in the fiscal year-end 20x4 Consolidated Income Statement?

Answer rating: 100% (QA)

Basic Informatiom Share held by Raynolds Interiors 90 Depreciation every year 8000010 8000 Depreciat... View the full answer