Question
5. Company Y and Company Z are both wholly owned subsidiaries of Holdco. During 2018, Company Y manufactured a machine for a total cost of
5. Company Y and Company Z are both wholly owned subsidiaries of Holdco. During 2018, Company Y manufactured a machine for a total cost of $10,000,000 and sold it to Company Z for a purchase price of $15 million on 12/31/18. Company Z will use this machine beginning 1/1/19 over its useful life of 5 years. The following are the effects of the required entries in the consolidation for Holdco to increase or decrease income recorded in the separate financial statements of each entity associated with this transaction:
2018 2019
a. $5 million decrease in profit $1 million increase in profit
b. $5 million increase in profit $ 2 million decrease in profit
c. $5 million decrease in profit No change in profit
d. $10 million decrease in profit $2 million increase in profit
e. None of the above
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