Question

Which of the following events is an intercompany transaction? A) a capital contribution B) a parent corporation's sale of stock of a subsidiary corporation to a nonmember of the group C) dividend payment received from a subsidiary corporation to its parent corporation; the subsidiary corporation is not an includible corporation D) accrual of interest on a loan made by one group member to another group member; both group members use the accrual method of accounting 46. Which of the following events is an intercompany transaction that requires the deferral and later recognition of income? A) sale of inventory from a subsidiary corporation to its parent corporation B) accrual of rentals on a lease of real property owned by one group member that is used by another group member; both group members use the accrual method of accounting C) cash dividend payment from a subsidiary corporation to its parent corporation D) None of the above transactions require the deferral and later recognition of income. 47. Santana Corporation and Andrei Corporation file consolidated returns. In January 2017, Santana sold Andrei Land witha basis of $100,000 for its fair value of $125,000. Andrei sold the property to an unrelated party in April 2018 for $175,000. What amount of gain should be reported for these transactions in the consolidated returns for 2017 and 2018? A) 2017 $25,000 B) 2017 2018 $50,000 2018 $25,000 C) 2017 SO D) 2017 $25,000 2018 $75,000 2018 $75,000

Answer 1

45) Ans: An intercompany transaction is one between a Parent company and it's subsidiaries or other related entities.

Dividend payment received from a subsidiary corporation to its parent corporation is an intercompany transaction.

So, (C) is correct.

46) Ans: Accrual of rentals on a lease of real property owned by one group member that is used by another group member requires later and deferral recognition of income. Because both group members use the accrual method of accounting. According to accrual method of accounting we can recognize income on financial statements in the period we earn it.

So, (B) is correct.

47) Ans: When a group of two or more businesses Is required to report financial results on a consolidated basis, generally accepted accounting principles or GAAP, require the elimination of intercompany sales during the consolidation process.

So, (C) is correct. In 2017 Capital gain is 0 and in 2018 Capital gain is $75000 which is calculated by this formula : Sales Consideration - Cost of acquisition = Capital Gain

$ 1,75,000 - $ 1,00,000. = $ 75,000