Assume Sub owns a ship, that has lasted 5 years already and is expected to last 15

Fantastic news! We've Found the answer you've been seeking!

Question:

Assume Sub owns a ship, that has lasted 5 years already and is expected to last 15 more years. It had an original cost of $1 million. It had an original life of 20 years, with zero expected salvage value. At December 31, Year 5, Sub’s books reflect cost of $1 million, and accumulated deprecation of $250,000. Depreciation expense in Year 5 was $50,000. If Sub continues to own this ship, and things go normally, it will record $50,000 of depreciation every year from Year 6-20, and then the ship will be scrapped.

a. Assume that on January 1, Year 6, Sub sells the ship to Parent for $900,000. What is the entry that Sub will record? (remember to include the Equipment account, cash, and accumulated depreciation accounts in your entry, as well as a gain or loss).

b. What is the entry that Parent will record when it buys the ship?

c. How much depreciation will Parent record in Year 6, on its own books, based on a 15 year remaining life and the $900,000 it paid?

d. What will need to be adjusted in consolidation in Year 6, and by how much? (3) (Hint: compare what the parent and the sub are reporting for the ship, accumulated depreciation, depreciation expense, and a gain or loss on sale of the ship with what have been recorded if the sub continued to hold onto this ship)

e. In Year 7, the parent continues to own the ship, and continues to record depreciation based on the 15 year life when it bought the ship, and a $900,000 basis. What will need to be adjusted in consolidation in Year 7, and by how much? (3) (Hint: compare what the parent and the sub are reporting for the ship, accumulated depreciation, depreciation expense, and retained earnings with what have been recorded if the sub continued to hold onto this ship)