Detailed Answer
(c) The key to this problem is that the equipment must
be revalued at Winston’s carrying amount (Winston’s original
cost less accumulated depreciation) in the consolidation process.
Assume the following potential scenario:
Winston buys a piece of equipment on 1/1/ Y2 for $1,000.
At 12/31/Y2, the equipment was depreciated $200, and Winston’s
carrying value is $800 ($1,000 – $200). On 12/31/Y2,
Winston sells the equipment to Foster for $900. Foster’s original
cost is therefore $900, and Winston will record a $100 gain that
must be eliminated. After consolidation, the equipment is reported
at $800, Winston’s carrying value. Winston’s carrying
value is also equal to Foster’s original cost ($900) less Winston’s
recorded gain ($100). Answer (a) is incorrect because Foster’s
original cost includes an unrealized gain that must be eliminated.
Answer (b) is incorrect because revaluing the equipment at Winston’s
original cost would not take into consideration the depreciation
already recorded by Winston. Answer (d) is incorrect
because the entire gain, not 80% of the gain, must be eliminated
because this is a downstream sale from the parent to the subsidiary.