1.

A parent owns 80% of its subsidiary. At the beginning of the current year, the subsidiary sells new equipment costing $40,000 to the parent for $85,000. The equipment has a 5-year remaining life at the time of sale, and straight-line depreciation is appropriate. The subsidiary has not recorded any depreciation on the equipment at the time of sale. It is now the end of the current year. The parent and subsidiary report the following balances related to the equipment:

	Parent	Subsidiary
Equipment	$85,000
Accumulated depreciation	17,000
Gain on sale of equipment		$45,000

What should be reported on the consolidated statements for 2020, with respect to this equipment?

a. Equipment, $85,000; Accumulated depreciation, $8,000; Gain, $-0-

b. Equipment, $40,000; Accumulated depreciation, $17,000; Gain, $-0-

c. Equipment, $85,000; Accumulated depreciation, $8,000; Gain, $9,000

d. Equipment, $40,000; Accumulated depreciation, $8,000; Gain, $-0-

2. A parent owns 80% of its subsidiary. The parent sells equipment to the subsidiary for a gain of $80,000 at the beginning of 2019. At that time, the equipment had a remaining life of five years. The subsidiary uses straight-line depreciation with no residual value, and still holds the equipment at year-end. How will the intercompany eliminations for this transaction affect consolidated income for 2019, assuming the subsidiary still holds the equipment?

a. $12,800 increase

b. $16,000 increase

c. $48,000 decrease

d. $64,000 decrease