Grey Corp owns 57% of Blue Company. On January 1, 2017 Grey sold Blue a machine for $68,766. Immediately prior to the sale, the machine was recorded on Grey's books at a net book value of $29,299. Prior to the sale, Grey was depreciating the machine on a straight-line basis with 7 years of remaining life and no salvage value. Blue plans to adopt the same depreciation assumptions as Grey. What elimination adjustments with respect to this sale must be made to consolidated net income in 2018 (ignoring income tax effects)?

The amount of $39,467 profit from the machine sold by Grey to Blue must be eliminated.

Explanation:

When asset are transferred or sold between companies in the same group of companies, no gain or loss will be recognized. Therefore, any gain or loss will be eliminated before the asset is consolidated.

Since Grey Corp owns 57% of Blue Company, it implies that Grey Corp is the parent company of Blue Company in the group of companies and the profit to be eliminated from the machine sold can be calculated as follows:

Profit on intra group asset disposal = $68,766 - $29,299 = $39,467

Therefore, $39,467 profit from the machine sold by Grey to Blue must be eliminated.

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