Detailed Answer
(a) When preparing consolidated financial statements,
the objective is to restate the accounts as if the intercompany
transactions had not occurred. Therefore, the year 1 gain on sale
of machine of $50,000 [$900,000 – ($1,100,000 – $250,000)]
must be eliminated, since the consolidated entity has not realized
a gain. In effect, the machine must be reflected on the consolidated
balance sheet at 1/1/Y1 at Poe’s cost of $1,100,000, and
accumulated depreciation of $250,000, instead of at a new “cost”
of $900,000. For consolidated statement purposes, year 1 depreciation
is based on the original amounts [($1,100,000 –
$100,000) × 1/20 = $50,000]. Therefore, in the 12/31/Y1 consolidated
balance sheet, the machine is shown at a cost of
$1,100,000 less accumulated depreciation of $300,000
($250,000 + $50,000).