Question

A parent sells land costing $4,000,000 to a subsidiary in 2019 for $4,500,000. The parent owns 80% of the subsidiary. Suppose the subsidiary sells the land to an outside party in 2021 for $5,200,000. What is the effect of the $500,000 intercompany profit confirmed in the year of sale to the outside party on Equity in Net Income and the 20% Noncontrolling Interest in Net Income?

Select one:

a. Add $500,000 to Equity in Net Income; No effect on the 20% Noncontrolling Interest in Net Income

b. Add $500,000 to Equity in Net Income; Add $100,000 to the 20% Noncontrolling Interest in Net Income

c. Add $400,000 to Equity in Net Income; No effect on the 20% Noncontrolling Interest in Net Income

d. Add $400,000 to Equity in Net Income; Add $100,000 to the 20% Noncontrolling Interest in Net Income

Answer 1

Transaction - 1 :-

parent company sold land having the value of $4000000 to its subsidiary company at $4500000.

Transaction - 2 :-

There after the subsidiary company sold the land to outside party for $5200000.

In both the given cases after the second transaction happened that means the sale of land by subsidiary company to the outside party got a profit of $700000 to the subsidiary company.

This profit of $700000 confirms the profit in the 1st first transaction that is the sale of land by parent company to subsidiary company i.e $500000

So here $700000 i.e ($5200000 - $4500000) profit is gained by subsidiary company on the sale of land to outside party. $500000 i.e ($4500000 - $4000000) profit is gained by parent company on the sale of land to subsidiary company.

So, the profit earned in transaction -1 is purely belongs to parent company there is no share to the subsidiary company.

Then add $500000 to equity in net income and no effect on 20% of non controlling interest.

The Answer is option A.

These are all the information required to solve the above given question.

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