Correction of Elimination Procedures Plug Corporation purchased 60 percent of Coy Company’s

Correction of Elimination Procedures

Plug Corporation purchased 60 percent of Coy Company’s common stock approximately 10 years ago. On January 1, 20X2, Coy sold equipment to Plug for $850,000 and recorded a $150,000 loss on the sale. Coy had purchased the equipment for $1,200,000 on January 1, 20X0, and was depreciating it on a straight-line basis over 12 years with no assumed residual value.

In preparing Plug’s consolidated financial statements for 20X2, its chief accountant increased the reported amount of the equipment by $150,000 and eliminated the loss on the sale of equipment recorded by Coy. No other eliminations or adjustments related to the equipment were made.

Required

As a member of the audit firm Gotcha and Gotcha, you have been asked, after reviewing Plug’s consolidated income statement, to prepare a memo to Plug’s controller detailing the elimination procedures that should be followed in transferring equipment between subsidiary and parent. Include citations to or quotations from the authoritative literature to support your recommendations. Your memo should include the correct elimination entry and explain why each debit and credit is needed.