Water Company owns 80 percent of Fire Company’s outstanding common stock. On December 31, 20X9, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than its original cost. On a consolidated balance sheet at December 31, 20X9, the carrying amount of the equipment should be reported at

Original cost of the equipment paid by Water to Fire minus the gain recorded by Fire.

Explanation:

The general rule before consolidating the accounts of a parent and its subsidiaries is that all the gains arising from transactions between the parent and its subsidiaries must be eliminated. The idea is that they are the same company and a company cannot not make profit from itself.

As regards this question, Water and Fire would record sales of the equipment in their individual books to make it appear that they were independen companies. That is, Fire would remove the sold and record the profit made from it, while Water record the asset bought in its book at the cost paid to Fire.

Since there is no real sales because Water and Fire are not different companies in reality, the gain recorded Fire must be eliminated from the consolidated accounts.

Therefore, the equipment will appear in consolidated account at original cost of the equipment paid by Water to Fire minus the gain recorded by Fire.

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