How should we account for the equipment

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Reference no: EM132764912

Question: Sweets and Treats Inc. has chosen your firm to be the auditor of a company which was formed on October 15, 2016. Mrs. Cadbury owns 70% of the voting shares of Sweets and Treats Inc. and her husband owns the remaining 30%. On October 31, 2016, Sweets and Treats Inc. acquired all of the voting shares of Hershey Inc., a company which was founded by Mrs. Cadbury's husband four years ago. Hershey Inc. will sell chocolate molding equipment supplies to Sweets and Treats Inc. at a gross profit of 25%. In a meeting with Mrs. Cadbury, she asks your audit partner the following questions.

Hershey Inc. owns some molding equipment with a net book value of $45,000. At the time that Hershey Inc. bought the equipment was estimated to be worth $45,000. However, our tax advisor has suggested that Hershey Inc. equipment should sell the equipment to Sweets and Treats Inc. for $40,000. The equipment is really only currently worth $40,000 because it is becoming obsolete due to the recent introduction of superior technology. Hershey Inc. can use the tax loss that the sale will generate because the company has been paying a lot of income taxes since it was formed. Assuming the sale takes place, how should we account for this equipment?

Reference no: EM132764912

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