Why does an intra-entity sale of a depreciable asset

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Case Study: Barker Company owns 80 percent of the outstanding voting stock of Walden Company. During the current year, intra-entity sales amount to $100,000. These transactions were made with a gross profit rate of 40 percent of the transfer price. What amount of these sales would be eliminated in consolidating the two companies?

Padlock Corp. owns 90 percent of Safeco, Inc. During the year, Padlock sold 3,000 locking mechanisms to Safeco for $900,000. By the end of the year, Safeco had sold all but 500 of the locking mechanisms to outside parties. Padlock marks up the cost of its locking mechanisms by 60 percent in computing its sales price to affiliated and nonaffiliated customers. How much intra-entity profit remains in Safeco's inventory at year-end?

Question: Why does an intra-entity sale of a depreciable asset (such as equipment or a building) require subsequent adjustments to depreciation expense within the consolidation process?

Reference no: EM133375400

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