[acctman32]

Hi Mike, the question is typed correctly, this one got me stumped.. I do not have a solution to this one yet but I have one similar with solution, but it is a down-stream example where as the question above is a up-steam example. see below for my other example:

Big Corp. sold equipment to Carin Inc. for $300,000 on January 1, 20X6. At the
time of sale, the net book value of the equipment on Big’s books was $250,000.
The remaining useful life of the equipment is five years; the estimated residual value is
$0. Big Corp owns 40% of Carin Inc. Both companies depreciate equipment on a straightline basis and pay income tax at a rate of 30%.

Required:
Prepare the required adjusting entries for Big Corp for its year ended December 31, 20X6.

Solution:

Preliminary calculations
Transaction price $300,000
Net book value 250,000
Unrealized gain 50,000
Investor’s share 40%
Initial adjustment required 20,000
Remaining useful life 5 years
Amount realized annually through excess depreciation $4,000

20X6 (unrealized profit on sale)
DR Investment income 20,000
CR Investment in associate 20,000

DR Investment in associate ($20,000 × 30%) 6,000
CR Investment income – income tax expense 6,000

20X6 (realized profit through excess depreciation)
DR Investment in associate 4,000
CR Investment income 4,000

DR Investment income – income tax expense ($4,000 × 30%) 1,200
CR Investment in associate 1,200

My question is, would the journal entries change if it downstream vs upstream, or can i follow the same logic?

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