When a firm owns 20% to 50% of another company, the equity approach is applied; however, in this case, the CEO of Company A sits on the board of directors for Company B.
By doing this, Company A would exert significant control over Company B, and the investment would be accounted for under the equity method.
To calculate the amount contributed to the partnership under GAAP, the fair value of the assets is used.
The net book value of assets provided to a partnership is used by the tax rule.
An assessment of an asset's value at the end of its useful life is called salvage value, or residual value. It is applied in the depreciation calculation.
Based on the usable life, the total of the years' digits is determined as (1+2+3+4) = 10.
Cost of asset minus salvage value (11,000-1,000) equals 10,000 for the depreciable base.
Depreciation Calendar
4/10th year times 10,000 equals 4,000.
2nd year (3/10) times 10,000 equals 3,000
3rd year (2/10) times 10,000 equals 2,000.
4th year (1/10) times 10,000 equals 1,000
Cash Collected – $300,000
Beginning Balance Accounts Receivable – ($50,000)
Ending Balance Accounts Receivable – $70,000
Unearned Revenue – ($6,000)
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Service Revenue – $314,000
As this would be an intercompany transaction, the gain that Bobcat Corp would record would be removed and the land would be written down to its original value when the consolidated financial statements are published (the amount of the gain).
The 32,000 understatement of initial inventory results in a 32,000 understatement of cost of goods sold and an understatement of the cost of products offered for sale.
The cost of goods sold is understated by 57,000 due to the 57,000 overstatement of ending inventory. This total cost of goods sold is 89,000 underestimated.
