Question

P Ltd acquired 80% of S Ltd in 20x6. In February 20x7, P Ltd sold a piece of land, which was carried in its books at $100 million, to S Ltd for $120 million. S Ltd sold the land to outside party for $150 million in March 20x8. The consolidation adjusting entries required in relation to the land for 20x7 and 20x8 consolidation should be:

2017:

2018:

Answer 1

2017

As P Ltd acquired 80% of S Ltd, P Ltd is the holding company and S Ltd is its subsidiary.

When an asset (land) is sold by a holding company to its subsidiary the gain or loss realised by the parent company should be eliminated in order to eliminate the unrealised profit or loss.

Entry at the time of transfer

Particulars	Amount ($millions)
S Ltd a/c Dr	120
To Land a/c	100
To Gain on intercompany sale of land a/c	20

Consolidation adjusting entry for elimination unrealised gain

Particulars	Amount ($millions)
Gain on intercompany sale of land a/c	20
To Land a/c	20

There should be no gain or loss from related companies reported in the consolidated financial statements until the land is sold to a outside party.

2018

The gain on the original transfer is actually earned and recognized only when the land is subsequently sold to an outside party.

Entry at the time of transfer to a third party

Particulars	Amount ($millions)
Bank a/c Dr	150
To Land a/c	120
To Gain on sale of land a/c	30

Consolidation adjusting entry in the year of actual transfer to an outside party

Particulars	Amount ($millions)
Retained Earnings a/c Dr	20
To Gain on sale of land a/c	20