Intercompany Leases This activity is part of the graded discussion. Make your posting and comment on the posting of at least two of your peers. To secure long-term funds, to purchase assets, the parent may use intercompany leases as a source of funding directly to its subsidiaries or vice versa. Discuss the transactions that may create intercompany debt, which must be eliminated from consolidated financial statements. Phillips Machinery Corporation purchased machinery for cash of $60,000 on January 1, 2014. The machine has an estimated useful life of 5 years and will be depreciated using the straight-line method with no salvage value. The machine was then leased to Roadway Company an 80% owned subsidiary under a 5-year operating lease for $15,000 per year, payable January 1, every year.

Required

1. Record the 2014 entries for the purchase of the machine and the lease to Roadway Company on the books of Phillip Machinery Corporation.

2. Record the 2014 entries for the transaction on the books of Roadway Company.

3. Provide the elimination entries that would be made on the 2014 consolidate worksheet.