Question

A parent sells land costing $40,000 to a subsidiary in 2018 for $55,000. The subsidiary sells the land in 2020 to a third party for $65,000. On the consolidated income statement for 2020, the gain on sale of land is:

a.         $15,000

            b.         $10,000

            c.          $0

d.         $25,000

37.       A parent sells land to its subsidiary for $40,000 and reports a gain of $5,000. At what amount should the land be shown on the consolidated balance sheet?

a.         $ 5,000

b.         $35,000

c.          $40,000

d.         $45,000

38.       When completing a consolidation working paper, the eliminating entry for a prior year intercompany transfer of land includes a debit to the subsidiary’s retained earnings when the transfer is:

a.         A downstream sale and the transfer was made at a gain

b.         An upstream sale and the transfer was made at a loss

c.          An upstream sale and the transfer was made at a gain

d.         A downstream sale and the transfer was made at a loss

39.       A parent sold land costing $400,000 to its subsidiary for $450,000 in 2017. The subsidiary still holds the land at the end of 2019. On a working paper prepared to consolidate the financial statements of the parent and subsidiary in 2019, the eliminating entry connected with this land includes a $50,000 credit to:

a.         Investment in subsidiary

b.         Beginning retained earnings of the subsidiary

c.          Gain on sale of land

d.         Land

40.       A subsidiary sold its parent some land at a profit of $10,000 in 2019. The parent still holds the land. On a working paper prepared to consolidate the accounts of the parent and its subsidiary in 2021, the eliminating entry connected with this land includes a $10,000 debit to:

a.         Investment in subsidiary

b.         Beginning retained earnings

c.          Gain on sale of land

d.         No effect—elimination entry is not required

Answer 1

Solutions:-

36. Ans- d)25,000

Explanation:- As the first transaction was an inter group transaction, the gain was not recognized in consolidated financial results. However, when the sell is made to third party the entire gain of 25,000 (65,000-40,000) gets recognized.

37. Ans- c)40,000

Explanation:- Irrespective of the fact that parent sold the land to its subsidiary at a gain, the land would be reported at its original cost of 40,000. This is due to the fact that all the effect of group transactions is eliminated on consolidation and the gain does not represent a realised gain at group level.

38. Ans- c) An upstream sale and the transfer was made at gain.

Explanation:- Whenever a subsidiary makes transfer to its parent. This is called an upstream transaction. To eliminate the effect there was a debit to retained earnings, therefore originally the subsidiary credited its income on account of gain implying the transfer was made at a gain.

39. Ans d) Land

Explanation: While consolidating, the land would appear in group assets at an amount of 450,000. However, the appreciation in the value of land is not a realised gain. Therefore, there would be a credit to land with 50,000.

40. Ans b) Begining retained earnings

Explanation: As the transfer has not been made to third party. At the group level the gain is unrealised. While making transfer subsidiary credited its income a/c which became part of its retained earnings, thereby to eliminate the effect there would be a debit to subsidiary's retained earnings.