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A parent company sells land to its wholly-owned subsidiary in 2015, reporting a gain of $35,000....

A parent company sells land to its wholly-owned subsidiary in 2015, reporting a gain of $35,000. In 2020, the subsidiary sells the land to an outside developer and reports a gain of $60,000.

In the 2020 consolidation working paper, the elimination of this transaction will result in:

A.

A $95,000 decrease in land
B.

A $60,000 increase in investment in subsidiary
C.

A $35,000 increase in gain on sale of land
D.

A $35,000 decrease in beginning retained earnings
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Answer #1

In consolidation of Financial statements of Subsidary company and Holding Company the whole company is considered as one company and accounts are prepared

Explanation

Gain on sale of land to subsidary company by Holding company is considered as no sale as per consolidation workings

Actual Income to be recognised= 60000(on gain of sale of land)+35000(which is a cost in subsidary company)

=95000

Recording of investment in subsidary company =cost to holding company+35000(profit by holding company)

In case of omission of sale by subsidary to outside party will result in under reporting of income by 95000.

Omission of transaction effect : Asset will be reported at the cost to holding company and unrelaised gain on sale of asset in holding company 35000 /- books is reduced in consolidation workings.

So the answer is D. $ 35,000 decrease in begining retained earnings

Answer is not A and B since there is no reduction in land value and no increase in investment

Answer is not C since gain itself is not recognised there is a decrease in gain by 95000

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