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A parent owns 80% of its subsidiary. At the beginning of the current year, the parent...

A parent owns 80% of its subsidiary. At the beginning of the current year, the parent sells equipment carried on its books at $40,000 to its subsidiary for $50,000. The equipment has a 2-year remaining life, straight-line.

What is the effect of the above on equity in net income for the current year, reported on the parent's books, assuming the parent uses the complete equity method?

A.

$8,000 decrease
B.

$5,000 decrease
C.

No effect
D.

$4,000 decrease
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Answer #1
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In the books of Parent
Calculation of Gain on sale of equipment Amount $ Note
Sale Value 50,000.00 A
Less: Book value of equipment 40,000.00 B
Gain on sale of equipment 10,000.00 C=A-B
% of holding 80% D
Profit to be eliminated during consolidation     8,000.00 E=C*D
So net income will decrease by $ 8,000 in the parent's books, assuming the parent uses the complete equity method.
Answer is option A.
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